If you have spent any length of time working in ecommerce – especially in B2B ecommerce enterprises – then you will no doubt be aware of invoice factoring and how it is useful to temporarily deal with the type of cash flow problems that regularly arise in smaller ecommerce enterprises. Indeed, fastFACTR, a company specializing in invoice factoring, say that they see a great deal of the business from companies in precisely this position. However, when it comes to ecommerce, there is another type of “factoring” you might well be less aware of. This is debt factoring. But what is it, how is it different from invoice factoring, and what can it do to help your ecommerce venture?
What is Debt Factoring?
In essence, debt factoring can be thought of as a kind of invoice factoring, and like invoice factoring, it is all about helping a business’s cash flow. Debt factoring is when an ecommerce company forwards invoices to the debt factoring company and asks for a loan to cover them (until such time as the invoice is paid and the company has the funds to pay). The difference is that instead of commissioning the debt factoring company to simply pay the value of the invoice, they instead receive a loan to cover them. Moreover, there is an added flexibility in that any excess that is paid (i.e., not specified on the invoices) is given back to the ecommerce company at the end of the transaction.
When To Use Debt Factoring?
Beyond the obvious, there are many other advantages to debt factoring that could help you out in any number of business situations. Here follows a few of those situations:
When You Need Funding Fast
This point is of course related to the main advantage of debt factoring – that it solves short-term cash flow issues. In fact, as long as you can provide some evidence of future payment, it can be used in all sorts of situations where you need a quick cash injection that you know you will be able to pay back. And this is not always to do with cash flow problems. There may be a sudden bill to cover, or an unexpected shortfall. By providing evidence of any kind of future payment, you can get the money now.
When You Want to Speed Up Business Growth
One of the major problems that small ecommerce businesses suffer – in fact, perhaps the most major of all – is a confused attitude towards growth. Small ecommerce businesses primarily fail because they either expand too quickly, without making provisions for the increased responsibilities of growth, or because they do not grasp the nettle when the time is right. Sometimes, the time can be right for an inventory expansion or a marketing push, but the money is simply not there at that moment. This is where debt factoring can help.
Saving Time on Debt Admin
As mentioned, debt factoring is a straightforward process of getting an advance on future payment (in the form of a loan) and paying for it with a small fee. If you need to borrow money any other way, the process becomes considerably more complicated – and it is largely your responsibility. Debt factoring can help you free up time to work on more important business growth strategies.
Ultimately, debt factoring is a simply looser and more flexible form of invoice factoring. It is still reckoned in terms of the money that will come in in the future. If you are sure of your product and have confidence in your profits, it can be a massively helpful service.