Factoring most definitely impacts on profits.
Let’s have a look at the different ways factoring can impacts on profits.
The most obvious way is by reducing profits because of the costs involved. Factoring has a definite and not insignificant cost and these will impact on any bottom line figure. The key is to find the most cost effective solution that will give your business the cash flow solution it requires.
Increased sales can increase profits. I say “can increase profits” bacause margins obviously have to be high enough. Sales can be increased through factoring in the following scenarios:
- by offering credit terms to customers that you could not previously
- by providing working capital to fulfill new orders
- by opening up new export markets by allowing you to trade with peace of mind
- providing valuable working capital to fund growth
By using factoring you can also reduce the risk of bad debts which can increase profits.
Potentially you can also negotiate or take advantage of settlement discounts with suppliers which can also increase profits.
You really need to do some financial forecasts showing the bottom line with factoring and then the bottom line without factoring. It is important to look at the profit and loss forecasts and also the cash flow forecasts of both scenarios.