One of the most important factors when determining the health of a business is liquidity. This is the set of measurements used to determine how quickly and easily a business can convert its assets to cash. Debt factoring is a simple and effective way to increase a business’ liquidity by converting debts owed into cash.
The Importance of Liquidity
Although it may not seem like liquidity is important to a business’ operations, the reality is that how much cash a company has on hand is incredibly significant to its health. For example, if a business allows its customers to pay their debts 30 days after receiving products, the business has to put up cash at the beginning of the period, and may not receive cash until the end of the 30 days. During that time, the business may have other payments to make, such as employee salaries, taxes, rent costs, and inventory purchases.
Without sufficient liquidity, a business may not be able to pay its bills on time. In the short term, this may be fixed with small overdrafts and short-term borrowing. However, the interest rates on such borrowing are often relatively high, and they can quickly amount to a significant amount of money.
Debt Factoring Explained
Debt factoring is a transaction where a business “sells” its invoices, or the money owed to it by customers, to a third party. The third party gives the business seeking factoring cash immediately, multiplying the value of the invoices by a “factor” (typically between 70% and 85%). The third party also assumes the burden of collecting the debts. This leaves the business with cash that it can then use to pay its obligations.
Debt factoring makes it very quick and simple for your business to pay its bills without worrying about collecting debts from customers. This solution can help your business get back on track to sufficient liquidity.
Overall, debt factoring can be an excellent solution to your business’ cash issues, especially if you need cash immediately and are facing an unresolvable short-term liquidity challenge.