Factoring debt is a technique used to deal with one of the biggest problems for small businesses – cash flow.
Cash flow problems account for more than 80% of business failures. Without cash flow, you can’t pay bills and staff. You can’t purchase inventory or invest into the business to help it grow.
The thing is, debt factoring is often a customer-facing function that can impact your customer relationships without you even knowing about it.
Debt factoring is great for cash flow, but it effectively outsources invoicing. Customers who don’t understand its benefits may question why you’re using it, and the way the factoring service communicates with your customers can impact your relationship with them. FundTap is a debt factoring service that overcomes the biggest issues by allowing businesses to keep control over their own invoicing and keep costs down.
Debt factoring goes by a few different names, including invoice financing, invoice factoring or invoice discounting. It’s essentially a way of ensuring you get the money from your invoices faster.
Read more: Understanding how invoice financing works
Debt factoring works by engaging a factoring service to purchase invoices from you as soon as they’re issued. This replicates the effect of having customers pay invoices straight away, and means you’re more able to finance costs and investment during the time when you’d otherwise be waiting for payment.
Factoring services are a form of credit, but it’s much easier to establish a credit line than with a bank or other conventional service. Rates depend on the provider, but can be up to 10% of the value of the invoice.
Traditional debtor finance solutions are adopted by businesses for all of their invoicing. Customers pay invoices into the bank account of the factoring service, and they chase up late payments on your behalf. These are two ways it can impact customer relationships – more on that shortly.
When businesses go under because of cash flow issues, it doesn’t necessarily mean they’re in bad shape. Accounts receivable are a fairly reliable form of future income, but it’s not as useful as cash in hand.
One of the biggest advantages of debt factoring is it relieves cash flow pressure, and means you don’t have to rely on using your own bank balance to fund bills or any other outgoings.
Invoices commonly aren’t payable for 30 days (and up to 90 in some industries), and that’s only if they pay when they’re due. There are a range of overheads that will be due during this time, and businesses need to have enough money in the bank to cover these costs.
Many businesses simply don’t carry this amount of cash, which means looking for a form of business lending to help them get through. Debt factoring has a range of advantages over other lending options.
Business owners are notoriously time poor, and chasing up customers to pay overdue invoices is just annoying. You have plenty of things to worry about that will earn you money, but there is no value in calling or emailing late-paying clients.
In saying that, often if you don’t chase invoices then you don’t get paid. Collections often trump other tasks for this exact reason.
You can automate reminder emails to customers who haven’t paid invoices after a certain period of time, but if customers still don’t pay then you’ll need to do more.
Debt factoring takes control of all collections processes, which allows you to focus on more important things.
Debt factoring is much easier to get than various business financing options, and it takes nowhere near as long to arrange. You don’t need to secure lending against assets or other collateral, as invoices are considered reliable, liquid security.
These features make it ideal for small businesses that need quick funding.
Read more: What type of debt is best for your company?
Increasing your cash flow can really help to grow your business. In FundTap’s case, the average user has grown their business by 54% in the past two years.
Having cash on hand allows you to expand your product line, invest in technology, add more services, hire staff or do all manner of things that help to take your business to the next level.
Debt factoring rates are often comparable to interest rates charged on bank loans or credit cards, but it’s generally repaid much faster. Where it may take years to repay a bank loan, debt factoring is usually repaid within a month or so.
This makes it a much more affordable form of borrowing.
When factoring debt, you’re introducing a third party into the mix alongside you and your customers. Businesses spend a long time nurturing, growing and building customer relationships, so it’s worth considering how they might be impacted.
Customers will stop paying invoices to you and start paying them to your factoring service. This means going to them and asking them to change the bank account they have on file, as well as updating the bank account details on your invoices.
If they’re late to pay an invoice or have issues processing payments, the factoring service will contact the customer on your behalf. Businesses lose an element of control over the relationship with their customers by having another party engage with customers regarding your business together.
As a professional service, debt factoring providers are adept at communicating about invoices and payments, so there’s a good chance it won’t be an issue. However, it’s not a guarantee, and the idea of introducing another party into your relationship dynamic may be an issue – especially if your customer is temperamental.
If customers want to query anything in an invoice, they’ll need to speak to you about it. However, this can be confusing because they’ll be used to speaking to the factoring service about invoices. Ultimately, the customer experience will change – not necessarily for the worse, but it will mean rethinking how they do some things.
Having a debt factoring service also involves revealing to customers that you’re using it as a form of finance. This can also impact your customers’ perception of your business, and isn’t ideal for business owners who prefer to be discreet about their cash flow.
There are three key ways that using debt factoring can flow through to influence your client relationships. These misconceptions primarily stem from the fact that debt factoring involves having a third party take over your invoicing functions.
Debt factoring is by no means a new form of finance, but many people don’t fully understand it. This creates an opportunity for customers who haven’t encountered it before to draw their own conclusions about why you’re using debt factoring.
Finance in any form can be seen as a lifeline, so this may lead customers to think your business is in bad shape. It’s worth taking the time to explain how financial factoring can help with business costs and the other advantages it has, in order to prevent customers from over-thinking your reasons for using it.
Businesses tend to run invoicing in house, and it’s unusual to outsource invoicing. When this happens, customers will often ask why you’d do it, as well as wonder how it might impact the quality of the service they get from you.
One conclusion they can come to is it’s a sign you’re losing control of your business. They may struggle to see the benefits of a company voluntarily outsourcing invoicing – again, it’s worth explaining the benefits in order to reassure them that nothing’s wrong.
Related to the last point, customers can figure that the debt factoring service is a debt collection agency recovering an amount you owe to one of your suppliers. As well as the implication that you’re in financial stress, customers can worry about being harassed by a debt collection agency to chase debts.
Invoice factoring is a particularly good finance option for small businesses that need a cash flow boost. While traditional factoring services can create issues with customer relationships, FundTap has been designed to overcome these problems and give businesses greater flexibility.
FundTap doesn’t take over invoicing functions in the same way that debt factoring services do. When you’re with FundTap, customers still pay invoices into your bank account.
FundTap is linked to your accounting system so the amount is immediately debited back to FundTap when the customer pays the invoice. It’s hands-off and allows you to retain full control of your relationships with your customers.
The flexibility you get with FundTap also helps to keep costs down. You can pick and choose which invoices you want to have financed, so if you don’t need FundTap one month, you don’t have to use it. There’s no penalty, and no minimum obligation to use it.
FundTap also has none of the set up, administrative or other fees that other providers charge. It’s been set up to overcome many of the old problems with debt factoring so that business owners have more freedom and flexibility in their lives.