If your business gets cash-flow blockages on a regular basis due to a large number of credit clients being on your sales ledger, then you could find a lot of cash constraints affecting the smooth functioning of your business at regular intervals. This could pose a problem, when you might need money to pay your suppliers or employees and would put all your expansion plans on the back burner.
Business factoring is a process, where a factoring company would 'buy' your credit invoices and provide you with immediate cash in exchange for a small factoring fee that could range from 1.5% to 5%. Even though factoring is much more flexible and easy to acquire than a bank loan, there are still some pros and cons that need to be kept in mind, before taking a blind plunge. Here are some advantages and disadvantages of business factoring.
Advantages
The biggest advantage of business factoring is that you get instant cash against your credit invoices. This means that you do not have to painfully bite your nails, as you wait for the due date of your various invoices to arrive. This process thus improves your cash flow and since it depends on the number and amount of invoices that you submit to your factoring company, it will enable you to receive amounts on a regular basis, thus maintaining a positive cash flow at all times. This will enable you to go in for larger orders, make larger purchases, in order to get the benefit of quantity discounts and even pay your employees and suppliers on time.
You might also be able to put your expansion plans into action, which previously might have been stuck due to lack of cash. If you have a non-recourse arrangement with your factoring company, then your factoring company would assume the responsibilities of following up and even collecting the pending payments from your clients on the due date. This could prove to be a boon for your business, since it would enable you to focus your energy towards increasing your sales.
Disadvantages
Since this service comes at a cost, you will first need to examine as to whether your profit margins can take in an additional load of 1.5% to 5%. If your profit margins are already low, then you might not be able to absorb this fee. If you are providing a higher credit period with low margins, then this process might not be suitable for your business. In case you go in for a non-recourse arrangement with the factoring company, then you will also need to check the efficiency of their collection staff. They will have to be polite, while asking for the due payments. Your clients will also need to be told of your new arrangement and some of them might not be comfortable with it. You could also lose a few clients in this process. A factoring company might not be as accommodating as you were and could be very aggressive, while pursuing your payments.
Thus, you should look at both sides of the factoring coin, before you make up your mind. Even though there are many advantages to factoring, there are other factors that are bound to affect your profitability and might also affect your relations with your clients. Therefore, you should examine your business model, your profit margins and the relationship with your clients, before you think about utilizing the services of a factoring company.
Before you make the incorporation decision, you need to consider all of the advantages and disadvantages that incorporating brings.
This article will lay out and explain all of the pros and cons that incorporation brings ...
Benefits of Incorporation:
Personal Liability Protection
An incorporated company is a separate legal entity responsible for its own debts. Shareholders only have responsibility for servicing debts and liabilities up to the value of their equity in the Company.
Creditors of a corporation can only seek payment from the assets of the incorporated business and not from the personal assets of shareholders, directors and officers.
As a small business owner of a non incorporated company, your personal assets are at risk if your business fails to service it's debts.
Personal liability protection is therefore a major benefit of business incorporation.
However, owners forming new corporations with small amounts of invested capital may well be asked to provide personal guarantees that credit will be honoured to reduce the risk of the lender.
Also, owners of incorporated businesses are required to personally ensure that the company makes its required tax repayments.
Protection From Legal Action
As with personal liability protection from debts above, the personal assets of the company's owners is protected by the separate legal entity status in cases where the incorporated company faces legal action.
Note, incorporation does not protect a company's officers from liability and prosecution in cases where the company is found guilty of criminal negligence.
Tax Advantages
Some incorporated businesses can enjoy lower taxation rates following business incorporation compared with partnerships and sole traders. One way of achieving lower taxation is to minimise the salary paid to the owners to reduce higher rates of personal taxation, and draw income from the business in the form of dividends which are taxed at a lower rate.
Obviously professional advice from a qualified taxation expert should be sought in all instances as all personal circumstances are different.
Other taxation benefits of incorporation are that once incorporated, many additional items of expenditure become tax deductible. For example medical expenses, entertainment expenses, vehicle and travel costs, recreational facilities and pension costs all become tax deductible. This can be a significant cash benefit. In particular money placed in an approved pension plan is tax free as is the funds growth.
Raising New Capital
Once you've incorporated your business, the ability to issues shares simplifies the process of raising capital investment. It's also easier to get loans and other finance approved from financial lending institutions if you are an incorporated company.
Transferring Ownership
The existence of shares also simplifies the sale of your business in the future. Also should an owner or director die, the business can continue to operate indefinitely.
Business Credibility
Having the words Inc or Corp in your business name gives a positive perception of long term financial stability.
Disadvantages of Incorporation
Double Taxation
Once incorporated, earnings are subject to double taxation, whereby, company profits are taxed, and then the dividends paid to shareholders from the "net" profits are also taxed.
With a non-incorporated business, the income the owner receives from the business is only taxed once. Double taxation can be avoided if the corporation is registered as an "S-Corporation"
Statutory Compliance Costs
Compliance with legal and accounting requirements places a significant burden on companies in terms of staffing, cost and time. There are also fees associated with the initial company incorporation, and ongoing operations.
Loss of flexibility The separate legal entity status of incorporation also means that the company finances are separate from the individual's, therefore the individual cannot "borrow" money from the accounts of the corporation, and statutory requirements in general reduce the flexibility of what can and can't be done with the business and its finances.
The above are some of the key advantages and disadvantages that you as a business owner need to consider before you begin the process of incorporation. You should always seek legal advice as all cases are different.
Both Kris Koonar & Richard Taylor are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Kris Koonar has sinced written about articles on various topics from Site Promotion, Certified Public Accountants and Culture and Society. Company Phoenix Capital group is a one stop transportation services company. Freight Shipments and related. Kris Koonar's top article generates over 550000 views. to your Favourites.
Richard Taylor has sinced written about articles on various topics from Finances, Internet Marketing and Internet Marketing. Richard Taylor is an MBA and Company Director with a particular interest in small business start ups. Click on the following link to learn more about the benefits and disadvantages of. Richard Taylor's top article generates over 6600 views. to your Favourites.