Many small businesses today struggle with cash flow, and overcoming the related challenges can be the difference between succeeding and being forced to shut down. While smaller companies will often feel this kind of pressure until they achieve a certain level of success and competitiveness, there are ways of easing the strain until that moment arrives. In many cases, for example, a well-established arrangement known as invoice factoring can make a real difference.
Even to a company that is currently struggling with paying its own bills, many outstanding debts will often be owed. With the usual norms of doing business meaning that invoices will not come due until some time after they are issued, many small companies could benefit from ways of bridging that gap.
This is where factoring comes in, and it often does so in ways that will make excellent sense for smaller companies. A specialized agent known as a factor can volunteer to assume the right to collect on certain invoices, paying an agreed-upon sum up front in exchange. As a result, a small business that has outstanding invoices but which lacks cash can exchange one for the other.
Naturally enough, there are a number of details to understand about factoring, and doing so will make using this tool much easier. For one, every factoring arrangement will involve giving up some portion of the value of the invoices involved, as this is the price to be paid for gaining access to cash in the here and now.
For another, factoring deals can be broken down into two different types, each of which has its own distinctive strengths and weaknesses. With factoring that includes recourse for the factor, the original issuer of the invoice will be on the hook should the associated third party fail to pay off. For non-recourse factoring, on the other hand, the factor assumes all the risk of default from the moment of taking possession of the invoice.
As might be expected, factoring arrangements of the former kind will tend to impose lower costs than with those where no means of recourse is preserved. Choosing between these two basic options can take a bit of thought, but either can prove to be very valuable for businesses in need of cash.