When considering debt factoring Christchurch, it is imperative to know its pros and cons. This is imperative as doing this form of analysis will give useful information for business financial decision making. For its use to be viable, the benefits of using factoring need to outweigh the downsides.
In financial management terms, debt factoring Christchurch refers to the act of outsourcing the credit-control of an organization to a third-party. Factors are usually owned by the banks and for an agreed fee, the responsibility of collecting debt is transferred to the factor. Some of the services provided by Invoice Factoring NZ include:
1. Debt collection & administration- the factor takes on the sales ledger function of your business.
2. Financing- this is where the factor can be able to advance up to 80% of the debt’s value as they wait for the debtor to pay back. The balance is paid to your organization upon the collection of the whole balance.
3. Credit Insurance- here the factor will be willing to take upon irrecoverable debt but decides who purchases what on credit from your business.
The Benefits of Using Debt Factoring Christchurch
- Frees Up Management Time
Managing and chasing debtors tend to take a significant amount of time, which is delegated in core business aspects when factoring is incorporated.
- Saving Admin Costs and Staff Time
Another important benefit of utilizing factoring is that it saves you the cost of chasing debtors as well as that of having to update the sales ledger.
- Acts as Insurance
You ideally get to enjoy some kind of insurance in situations where you purchase a non-recourse form of factoring. This means that you will not have to worry too much about losing money as a result of bad debt. However, this still comes at a cost.
- New Source of Finance
Traditionally, factoring is designed to help companies accelerate the cash collection process by offering cash against outstanding receivables. This is turn improves cash flow and liquidity. This is a great way of raising finance, particularly when you need it urgently.
The Downsides of Factoring Debt
- Loss of Client Goodwill
When you start utilizing debt factor to collect money from your clients, some customer goodwill might be lost. This could be as a result of various reasons, from the fact that most clients don’t want their details passed to a factoring firm, with the thought that it could affect their credit rating. Some clients may be hesitant to deal with a factor due to the fear of their image being tarnished, particularly those who want to get a mortgage from a bank.
- It Can Be Expensive
The finance cost or cost of borrowing is often around 1.5% to 3% higher than the conventional bank lending rate. When this is coupled with other costs of utilizing a factor, it can be non-viable.
As you can see, there are pros and cons to debt factoring Christchurch and you need to do proper analysis to determine whether it’s a solution for you. For more information, head over to Invoice Factoring NZ.