Tech News: Tech Companies Turn to Factoring to Finance Growth
Factoring is a source of financing by which a given company sells part of its accounts receivables in exchange for instant cash. Often, it’s used to finance the operational expenses of recipients, but there are an increasing number of businesses that are now using it to finance their growth. Why are tech companies increasingly relying on factoring and is it really an advanced alternative financing source?
Bank loans aren’t easy to secure
It’s a common belief that only startups have trouble securing bank funding. But that’s not necessarily true. In the technology sector for instance, turnovers are often subject to high fluctuations. As you might know, businesses usually use projection models to anticipate their annual revenues. Although these models take into account margins of error, there’s nothing much that businesses can do when fluctuations are higher than expected. When this happens, companies need to make sure that they have enough cash to meet their operational needs such as payroll. This is where factoring firms become relevant. In the case of medium-sized tech companies, factoring is in fact a guarantee that cash reserves won’t run out.
Is factoring really the ultimate financing source?
Factoring is often considered the best source of alternative financing to which startups and medium-sized companies have access. This is because there are fewer requirements to meet than for bank loans, and the money is available immediately. Yet, factoring can turn out to be very expensive depending on the quality of the borrower’s receivables. Factoring companies charge a commission based on the associated risk, the amount lent, and the length of the contract. The longer the maturity, the higher the commission percentage. Plus, certain factoring companies accept to lend money only if the borrower is willing to sell a given share of their receivables. This can be quite restrictive for businesses that are anticipating a reduction in their revenues and are turning to factoring for cash guarantee purposes.
Factoring certainly is an interesting source of alternative financing. Nevertheless, it shouldn’t be overused since its cost can be very substantial based on the amounts borrowed and the contracts’ lengths.