If you’ve ever looked into alternative financing options for your small business, you’ve probably stumbled across factoring before. This is an arrangement in which you’re able to sell your outstanding invoices to a third-party factoring company in order to obtain faster access to cash you might otherwise be waiting on for weeks, or even months in some cases. However, like any other financial arrangement, there are risks and drawbacks to this setup, just as there are plenty of benefits. Understanding each side is an integral part of making the right decision for your business’s future.

The Benefits

As previously stated, the main benefit of factoring is that it allows you to get your hands on your money right away, rather than waiting. This means you won’t ever need to worry about missing out on important opportunities, like new orders from big clients, expansions and other chances to advance your company and generate a profit. It can also help you to keep up with the demands of running a small business without worrying constantly about your cash flow dwindling due to slow customer payments. Furthermore, it’s an excellent way to get your business the funds it needs without submitting yourself to debt.

The Risks

Of course, no good financial opportunity is without its risks. First and foremost, you need to keep in mind that not every third-party factoring company is a good one. Therefore, you need to ensure you’re selective about which companies you’re working with if you believe this is the right route to take with your business.

Next, you’ll need to consider what this step will do to your relationship with your customers. While there are customers that might trust you and your business with their money, they might not necessarily trust the third party company you choose to work with. Handing over their personal information to another entity might not go over well in some cases.

Finally, not all factoring is legal. That’s why you’ll need to be diligent in reviewing the laws and regulations governing this type of arrangement if you decide to use a company for this service. Otherwise, you could find yourself in a great deal of hot water with the authorities, and find yourself dealing with more financial trouble than you began with.

If you know the risks and are familiar with the pitfalls to keep an eye out for, this financial arrangement can work wonders for your company if you happen to be undergoing a financial struggle. Speaking to a professional can help you learn more, and help you decide whether or not it’s a good move.