Running a successful business is difficult; there are so many things that can go wrong. When you’re running a business, some of what can go wrong is within your control. You need to make sure you plan well and use your resources wisely. However, much of it is not in your control. You can plan for an uncontrollable event to the extent that you can set some money aside and have a contingency plan, but you can’t actually control it. That’s why so many businesses fail. For example, if you run a restaurant that has a standing order with a food supplier, you might pay that supplier at the end of every month. If that supplier supplies food for five restaurants and one of them happens to go under, that supplier might have to increase their prices by 20% to offset the losses. That might undercut your profit margin, which causes you to miss a payment or two with the food supplier. Before you know it, your business is going into debt for something you couldn’t control.
The same thing happens to people and businesses that owe you money. If you have a lot of unpaid invoices for companies, you’ll want to shed those. A factor can help you.
What Is It?
Invoice factoring is a process by which a company sells invoices for services rendered to a factor, who then takes responsibility for collecting the debt. The value of the invoice is determined by how much money the client owes. The more money the person owes, the more valuable the invoice. Most factors will buy the invoices from companies at about 70 or 75% of the value of the invoice. The very best factors offer as much as 85%. If you’re trying to cover debts you owe, getting that money quickly is absolutely essential.
Why Not Collect Them Yourself?
Debt collection is an incredibly difficult and time-consuming process. Very rarely do people actually want to pay off their old debts, so you have to use a series of techniques to encourage them to do so. These techniques are time consuming and, sometimes, expensive. You have to pay an employee to make phone calls and send letters to these clients. If you’re a small business owner, you probably don’t have any extra employees, so all the time you spend collecting debts is time you are not doing the jobs you should be doing.
Big companies have entire departments devoted to debt collection; it is a profession in and of itself. You wouldn’t hire somebody unskilled to work in your company; you hire the best possible people for the job. Similarly, you should hire the best possible debt collectors.
Even if you trust that you will be able to eventually collect the debt, you have no idea how long that is going to take. A factor can pay you for the invoice very quickly to help you cover your expenses. You won’t be getting everything you’re owed, but taking a 15% loss is much better than a 100% loss, especially if the health of your business is on the line.