How Factoring Can Help You in a Difficult Economic Environment?
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How Factoring Can Help You in a Difficult Economic Environment?

by Peter Amundson

Economic crises directly impact B2C businesses as consumers’ weak buying power translates into lower sales and revenue. B2B businesses may enjoy a little more cushion as businesses will no doubt try to hold out as long as they can. Still, the ripple effect of the general public’s reduced spending will inevitably affect their bottom line. Institutional lenders will offer a lifeline in the form of loans, but it will come at a high cost – literally – as banks will impose high credit rating requirements and late payment penalties to transfer as much risk as possible over to the borrowers.

But there is a silver lining: when revenues are down and getting approved for traditional loans gets increasingly difficult, businesses can gain financing and improve their cash flows via factoring instead.  

To paint a clear picture of how factoring benefits businesses, we’ll talk about the challenges enterprises face during uncertain times and how factoring for business solves them.

Challenges to Businesses During Economic Downturns

Without delving into the difficulties each industry faces during economic unrest, here are common problems businesses experience when markets are sluggish and customer spending is low:

  1. Cash flow is running low
  2. Customers delaying payments as long as possible
  3. Unpaid invoices going to collections
  4. Banks raising lending requirements

Cash flow is running low

Unfavorable economic conditions make maintaining a healthy cash flow harder, which is essential for staying afloat during financial crises.  

Many don’t realize that debt is not always the main risk factor for a business, but rather an empty cash flow report. This is because as long as you have operating capital, you can keep your business running even if you have outstanding debts to your bank. You can keep the doors open and generate revenue to pay off your operating expenses and debts when you have money on hand to pay your suppliers, lessor, employees, and utilities.  

What happens if your cash flow dries up? Your first problem would be insufficient funds to pay the bills and operating expenses. This would then snowball into other problems that can eventually lead to closure.

  • You incur late payment penalties.
  • You’ll be forced to apply for additional loans to make payments, starting a cycle of debt.
  • Your credit score might suffer.
  • You’ll miss out on growth opportunities, like buying raw materials at lower prices or investing in promising partnerships and projects.
  • You’ll be forced to make budget cuts here and there.
  • Marketing is usually the first fund that gets cut, but your business can’t attract as many customers as it should with stymied promotions.

Factoring solves these problems by pumping much-needed cash into your business like fuel to an engine. As a result, you’ll have operating capital to pay for your daily expenses, make payroll on time, grab surprise opportunities, and avoid unfortunate budget cuts. Since factoring is not debt-based lending (you can receive an advance on your pending invoice, not a loan), there’s a lower risk of getting trapped in a debt cycle.      

Customers delaying payments as long as possible

If you are a B2B business, you may already know this problem. Suppliers give customers who are also business owners longer or staggered payment schedules to maintain good business relationships. Although it is beneficial for preserving business relationships, this practice can put your business in a tricky situation when paid invoices are no longer enough to sustain your daily operations.

Waiting on unpaid invoices is risky and can negatively affect your cash flow. As revoking existing payment terms can sour relationships with current customers, you’ll have to look for cash sources elsewhere. Debt-based lending is an option, but it’s wiser to minimize debts during an economic downturn.

Factoring can fill the gap in your cash flow without the risk of debt. Therefore, factoring for business would be a better option for companies that offer customers 30, 60, or 90-day payment terms.

Unpaid invoices going to collections

A secondary problem related to delayed payments often involves customers struggling to generate income who have no choice but to let their invoices age out to collections. Some companies solve this issue by hiring debt recovery agencies. Unfortunately, not all are subject to this luxury. For some, hiring debt recovery agents is an additional burden. Moreover, there’s no guarantee that customers can pay promptly and in full when confronted with a collection agency.

If your business is in the same situation as the latter, factoring – specifically non-recourse factoring – is a more advantageous alternative to debt recovery services because:

  • You shoulder zero risk of non-collection (because the factoring company absorbs all risks).
  • You are assured of getting paid with an advance of at least 80% of your unpaid invoices. 

Banks raising lending requirements

We’ve briefly touched on this in the introduction: banks will inevitably raise the credit rating requirement for loans. Some might even impose harsher penalties for delayed payments. This is to be expected because banks operate for profit and must ensure their financial gains. But the downside is that you, their customer, shoulder more risks every time you apply for a debt-based loan.

A traditional business loan would be justifiable if you need a substantial amount of capital and are prepared to commit to a multi-year repayment term. However, if you need operating capital immediately and the amount you’re looking for is equal to your pending invoices, then you may help to consider factoring. 

  • You’ll receive the advance to pending invoices within two days.
  • You can restore your cash flow’s vitality.
  • You can keep your business running smoothly and pay bills, payroll, etc., on time.
  • You can continue granting long and staggered payment terms to longtime customers and maintain a good relationship with them.

A Smart Alternative to Traditional Lending

Banks have and will always be an available resource for capital. Sometimes, however, the risk of traditional lending is higher than the potential gains. It pays to know that you have alternatives such as invoice factoring to fall back on.

For more information on how factoring works, explore our website or contact Business Factors & Finance for a one-on-one consultation. You may email or get in touch via our Contact Page.

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