As a business owner, having the capital to keep your business running is a top priority. Many businesses seek outside financing early on so that they have the ability to operate and grow. As a small business, it’s difficult to find a bank that’s willing to work with you.
Banks have tightened their credit to the point where their underwriting guidelines border on the unreasonable. It seems that the only businesses that qualify for a traditional bank loan are those that don’t need the financing!
The Alternative To The Bank Loan
Fortunately, there are options out there for the small business owner. One of those options specifically geared for the flexibility and volume that a small business needs is factoring.
When someone hears about factoring for the first time, there are always two questions. The first is, “what is factoring?” The second and most important is, “how does it help my business?”
Factoring gives you the ability to turn your accounts receivable into cash before you receive payment from your customers.
Once you’ve entered an agreement with a factoring company, you have the ability to assign your invoice to the factor. The factor advances a certain percentage, usually 80%, against the amount of the invoice. Your customer pays the finance company, which then sends you the remainder of the invoice minus their fee.
How Factoring Helps Your Business
When considering factoring, you have to realize that it isn’t one of those dime a dozen short-term business loans. A factoring company offers more than a simple loan. This finance company becomes a sort of back office to your business.
In a traditional loan, the bank is relying on your business to repay the debt; however, in factoring, the loan is repaid by your customers.
This is an important distinction. The factor is concerned with the quality of your customers as much, if not more, than the credit quality of your business. This fact provides a huge benefit to you.
Risk Assessment
Whenever you invoice a customer, you are essentially loaning them money. You have provided a product or service to them for promise of payment in the future. You probably wouldn’t loan someone money without knowing that they have the ability to pay you back, but many businesses do this all the time when they issue an invoice.
The factor reviews the credit quality of each customer you submit for factoring.
Collection Services
Collection efforts take up a considerable amount of time. That time is money out of your pocket. The people you pay to follow up on past due invoices could be spending their time on something that actually makes you money.
When an invoice you have factored becomes past due, the factor follows up on it. Since the invoice has been assigned to the factor, payment is due to the factor. That means that the factor has an interest in following up on past due invoices.
Flexibility
Financing with flexibility would be a great way to answer the initial question of, “what is factoring?” It really does sum up what factoring is all about. You have the ability to finance all of your invoices or just a handful as you need the funding.
This works great if your business is seasonal or if you have a few customers who don’t pay consistently. This also offers you the flexibility to get cash when you need to pay a vendor early or when you get a bulk discount on materials.
Factoring provides flexibility unlike any other form of financing.
Factoring benefits your business far above a traditional loan. It provides value-added services that aren’t available with other forms of financing. Look for a finance company to trust and see how factoring helps your business today.
Ready to get your company’s factoring program started? Click below to download our free tip sheet, Factoring Companies: Choose The Right One, and assess what the “right” factor means to your business! If you're ready today get started with factoring by calling 888.833.2286 or fill out this form to speak with a Cash Flow Consultant.
