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Risk Factors of Traditional Factoring

Topics: Finance, Credit & Payments, Management

Extending credit to your customers comes at a price. On the one hand, it can increase your customers' loyalty and average order size, but on the other hand, your business has to wait over a month to see your well-deserved payday. 

When businesses find themselves in a cash flow pinch they commonly turn to traditional factoring. Traditional or invoice factoring can seem like the only option when a customer’s slow payments are constraining your business growth, but we’re here to share some of the risks of traditional factoring to consider before you jump on board.

The Cost of Traditional Factoring

Factoring is an expensive way to finance your receivables. Yes, it feels good at first when you see the money hit your bank account, but it only pays for a fraction of your invoices. 

Typically, cash advances are 70 - 85% of the invoice value. Businesses that factor will then only receive a percentage of the remaining 15-30%, even if your customer paid the invoice in full. 

The factoring firm paid you a fraction of what your receivables are worth, and yet, you still have the risk and time involved to recover more of each invoice. This is why invoice factoring is usually recommended for companies with large profit margins.

Traditional Factoring is a Temporary Fix

Traditional Factoring is the duct tape solution to cash flow issues. Consider your cash flow issue like an above-ground swimming pool with a hole on its side - a literal flow issue. Once you see the hole and are aware of the situation, you patch up the hole with a large piece of duct tape. In this case, you think the hole, i.e. your cash flow issues, are fixed. But are they?  

Cash Flow Problem Solved…Right?

Traditional factoring is a temporary solution to a current issue. In the example above, once that duct tape gets wet, you’ll quickly realize that it was only a short-term solution that requires continual upkeep. What you really need is a long-term, permanent solution.

Traditional Factoring is Labor Intensive

Money never comes easy. Before you can see your money through invoice factoring, a few steps are required: 

  • Sending a funding request to the factoring company for every advance required
  • Manually filling out a form for each request 
  • Compiling the invoices that you want to be funded  

Don't forget to add in additional time and labor for the factoring company’s approval process. Wouldn't it be great if things were quick and painless where cash becomes available at the click of a button?

Remove Invoice Factoring Risks with Apruve

We recognized that businesses are commonly dealing with cash flow issues due to their credit programs, so we at Apruve set out to fix them once and for all. Through Apruve’s credit automation platform, we pay sellers (97% or more of an invoice) within 24 hours of the sale, we integrate with your current processes to minimize steps, and we take on your financial risk.

When you partner with Apruve, companies can permanently put down the duct tape and have the peace of mind that your pool will not flood the entire neighborhood.

Are you ready to solve your credit problems once and for all?

If your company is considering an invoice financing or factoring solution, it may be time to consider something even better. Apruve can help you set up a trade credit and A/R automation program for your business buyers, extending your working capital while enhancing the buyer experience. Learn more about Apruve or contact Apruve’s specialists to sign up for a demo today!

 

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ABOUT APRUVE

Apruve enables large enterprises to automate long-tail credit and A/R so you can stop spending 80% of your time and resources on 20% of your revenue. We partner with each of our customers to solve their unique credit, payment, and accounts receivable challenges and build the right credit solutions for your markets, customers, and goals. 

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