Few Things You Need To Understand About Factoring Before You Jump In Head First
If your business is growing quickly, turns receivables slowly or operates in an industry that banks are traditionally reluctant to lend to, you know that factoring may be your only option to obtain working capital. On the other hand, you may have spent weeks studying all of your options for financing your business and have decided that factoring might be right for you because it is easy, has very little paperwork compared to traditional financing, and is based on the credit of your customers rather than yours. Either way, there are a few things you need to understand about factoring before you jump in head first.
Keep in mind that there are several benefits to factoring. However the first thing you need to know about factoring is that it will generally cost your business more than traditional financing. When a factor buys your invoice at a discount, the discount percentage may not sound too bad. However, keep in mind that the discount rate multiplied by the turn ratio equals the effective interest rate you are paying by factoring. And obviously the higher the discount rate or the shorter the terms, the effective interest you pay increases. Factoring may be your financing option of choice, or it may be your only option. Regardless of your reason for choosing to factor, it is best to know all the facts and circumstances before entering into a factoring agreement.
Tags: Array, discount percentage, effective interest rate, financing option, financing your business, working capital
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