Why Debt Factoring Means Cash Flow for Business During A Recession

Why Debt Factoring Means Cash Flow for Business During A Recession

2020 has proven to be a year of unexpected economic disruption. Merchant Factors is witnessing an increasing number of SME’s and larger companies opting for debt factoring to maintain cash flow for business operations.

The COVID-19 global pandemic has caught businesses completely off-guard as countries have been forced to implement nationwide shutdowns. This stringent and abrupt limitation on commercial activity has resulted in an unprecedented global recession. This lack of cash flow is depriving organisations of the income they need for their daily operations and essentially their survival.

Now, more than ever, both small and large businesses are realising that debt factoring is fast becoming a valuable option to bolster cash flow for business.

According to Accountancy SA, Johnny Philippou, Managing Director of Merchant Factors says, “With different types of factoring increasingly being used by larger, more established companies as a means to maintain cash flow and boost growth, smaller and mid-sized businesses would do well to investigate this extremely powerful alternative form of finance.”

In this article, Merchant Factors unpacks 5 important reasons why debt factoring means cash flow for business operations.

What is Debt Factoring and Why Does it Mean Cash Flow for My Business?

According to Business Expert, “Debt factoring is another word for accounts receivable finance or the process of selling unpaid invoices for a percentage of their worth.”

It is a useful form of alternative finance designed to support the working capital or cash flow cycle of a company.

The company or SME receives up to 80% of their total amount of invoices owed while the factor or lender keeps the remaining 20% until the customer settles the factor. Upon settlement the remaining 20% (less a small fee) is paid back to the company. This money received can then be used as cash flow for business operations.

5 Important Reasons Why Debt Factoring is Essential for Cash Flow for Business:

1. Debt Factoring Provides Cash Flow and Helps Accelerate Growth:

When it comes to alternative forms of finance, debt factoring is the one option which immediately increases your company’s cash flow for business operations.

By bolstering a business’ growth potential, through freeing up valuable employee time and instantly injecting a healthy level of cash flow into your business, debt factoring can contribute substantially to the growth of a company as it is directly linked to turnover.

2. Debt Factoring Reduces Stress:

According to a MYOB survey, 52% of businesses struggle with stress due to issues with maintaining cash flow. Managing stress levels is imperative in every arena, including business.

By opting for debt factoring, you will increase your company’s cash flow for business operations and its capacity to maintain customer, partner and supplier relationships.

At Merchant Factors, we do not leave your business in dire straits and we ensure that we make the process as painless as possible for all parties involved.

3. Debt Factoring is a Debt-Free, Cash Flow Solution

It is important to keep in mind that with debt factoring you sell your assets to a factor to manage, therefore, debt factoring is not a loan. Handing over this responsibility (your invoices due) to a factor or 3rd party, passes the buck to them, so to speak, and allows you to maintain good financial health within your company.

BizFillings explains, “No debt. Factoring is a sale of assets (invoices), not a loan. For businesses that either cannot qualify for traditional debt financing or that simply do not want to incur more debt, factoring is a good alternative means of financing.”

4. Debt Factoring Equates to Immediate Cash Flow for Business

Debt factoring means an instant cash flow injection for your company’s business operations. Instant funding results in opportunities to reinvest while maintaining the health of your balance sheets and books.

In support of why debt factoring means cash flow, Companeo states in their article, Debt Factoring Advantages and Disadvantages, “First and foremost, a debt factoring plan means that the business which delivered the goods or services receives the actual funds claimed with the invoice almost immediately, regardless of the capacity of the end client to pay for the bill. Funds can be used to carry any necessary business operation instantly.”

5. Debt Factoring Shortens the Cash Flow Cycle

The Merchant Factors article on Business Growth, explains how debt factoring helps businesses grow by shortening the cash flow cycle. A shorter cash flow cycle provides companies with the capacity to better allocate capital and manage cash flow more efficiently.

Immediate payment also reduces the time-lag between collecting and receiving outstanding payments due.

During these unpredictable times, your business still has the opportunity to flourish and grow.

Merchant Factors offers a multitude of services that can help you achieve this:

Contact us to help bridge the gap and provide your company with debt factoring to achieve cash flow for your business.