Factoring: A Smart Strategy to Weather Inflation

Inflation is one of the most abrasive issues facing economists and companies, increasing the risk of a global economic recession. Following the latest United nation’s World Economic Situation and Prospects report, worldwide inflation projects an annual rate increase of 6.7% in 2022. Its fastest pace in approximately 40 years.

Debtors are experiencing prices rising considerably for goods and services as the strong demand collides with constant supply shortages. The causes are countless, and the instruments used to control price pressures can drive the economy into a recession.

Therefore, what can companies anticipate if inflation continues to increase rapidly?

Higher Borrowing Costs
As inflation continues to grow, so will interest rates, which makes the existing debt more expensive and financing opportunities harder to obtain.

● Increase in Overdue Account Receivable
As the prices increase for goods and services, debtors will have limited available cash flow to comply with financial obligations. Therefore, companies will witness an increase in overdue accounts receivable (AR) which will, in turn, increase borrowing and collection costs.

● Increased risk to debt
As inflation keeps growing, companies face the risk of higher debt. Customers may struggle to respond to their financial obligations.

Fortunately, measures to address increasing inflation exist nowadays, and factoring is a viable alternative to improve the financial resources of companies without incurring unnecessary debt that can bring along crushing interest rates.

How does factoring work?

Factoring allows businesses to get paid on their outstanding invoices, avoiding the regular 30-60-day wait time. It is an arrangement whereby a company receives financing based on a portion of the money owed by its customers (usually 80-90% of the outstanding invoices). Essentially, the factoring company is financing those slow-paying invoices. Factoring companies, like ExpoCredit, provide instant access to working capital without tedious approval processes or extended wait times generally associated with bank loans.

Main Benefits of factoring

Factoring companies provide credit protection in addition to a wide range of financial options, collection and receivable management services. Companies benefit from these services by reducing overhead expenses, specialized third-party invoice processing, and improved credit terms. Additional benefits include:

●  Improves a company’s cash flow by assisting in the release of capital from unpaid debts. Many companies find it helpful to receive the cash immediately since it provides them the facility to operate and respond to their expenses.
● Acquires the customer default risk that the company would commonly assume.
● Manages the collection of debts and pays back the company anything that remains after deducting the financing amount and associated processing fees.
●  Generates credit checks and financial reports.

For more details, please consider our blog  5 advantages of invoice factoring

Choosing the right factoring partner

The selection of a factoring partner can be considered one of the most critical decisions a business can make. Consider below some suggestions for a reliable and efficient factoring partner for growing businesses.

● Identify past clients. Understand their target markets and previous industries they have worked with to ensure a smoother factoring process.
● Evaluate their service fees. The financing received may have requirements that the business must meet.
● Understand the requirements and processes. Usually, companies are requested to provide confidential information about their financial status or clients.

ExpoCredit performs as a strategic partner to create flexible, customized financial solutions that meet businesses’ needs and help them overcome short-term cash flow challenges.