There are a variety of ways that a factoring service may benefit a business, thus helping it overcome the typical challenges related to consistency and growth, especially those obstacles encountered by a smaller business enterprise. Factoring doesn’t increase the debt of the business. There is no need or requirement for the encumbering of assets, i.e., collateral.
The daily operations of a business may overwhelm a business, especially when it begins to show steady signs of growth. As new accounts increase sales, the underlying risks of the business may tend to financially cloud the future, as well as the present. Factoring helps facilitate growth in this very situation by helping to minimize the common negative aspects of the changes associated with business expansion.
Not only may factoring help a business enterprise deal with timely payment and cash flow, it can help alleviate the task of exercising the due diligence necessary to assess the business stability and reputation of customers, necessary to establish credit worthiness and viability. Small businesses typically must utilize the valuable resources of time and money to perform due diligence related to customers and clients.
New orders from new customers is a primary and obvious goal for an enterprise’s business growth. However, companies don’t know much, if anything, about most new accounts. How long has the client engaged in the industry? Does it have a reputation and, if so, what is it? How often has it been sued? How likely is it to make payment in a timely fashion? There’s certainly a level of apprehension in sending product out to a new customer. How will it react to and deal with problems related to its order? Will it complain about the slightest or most trivial discrepancy?
A third-party factoring company performs all of this due diligence so a business may confidently ship an order knowing that payment will be timely received. It will check the name and corporate standing of the business while monitoring and maintaining contacts. In addition to determining the potential client’s involvement in lawsuits, the factoring company will identify any tax issues to determine if the client’s assets are significantly encumbered with liens and other limitations affecting credit worthiness.
The identification of tax issues is vital since the IRS has the authority to supersede the factoring company’s position relative to a receivable asset. Thus, a factoring service may provide substantial benefits related to due diligence and the credit-worthiness of clients, thus eliminating and efficiently managing risk.
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