Seeking out funding is a big step for any business. Whether it’s a startup looking for their first round capital or a seasoned business looking for a little more cash flow, short-term business loans are a popular option. They allow you to get the funding you need on a short-term basis without giving away half of your business to an outside investor.
Within the realm of short-term business loans, there are many possibilities; however, each option falls into one of two broad categories -- secured debt and unsecured debt.
Unsecured debt really shouldn’t be used for business funding on a long-term basis as it is significantly more expensive and the amount you are able to borrow is very limited compared to other options. It just doesn’t make sense to pay more and get less than what you could get with a secured loan.
Secured debt is a great option as it’s cheaper and the amount you are able to borrow is tied to the value of the asset you want to finance. This allows your financing to grow with your business. Conversely, it also helps keep you from being overextended since there is a hard asset that limits the amount you are able to borrow.
A very specific kind of secured debt is the factoring loan. This is a laser-focused financial product specifically designed to help the cash flow of small to medium-sized businesses.
What’s So Special About The Factoring Loan?
The factoring loan allows you to get cash as soon as you invoice. It solves the biggest factor of cash flow issues -- customers taking too long to pay.
Offering terms to your customers is a delicate balance. On one hand, you want to be accommodating to your customers. You want to offer them favorable payment terms in order to win and to keep their business.
Offer terms that are too long and you risk not having enough cash to continue running your business. Offer terms that are too tight and your customers might take their business elsewhere.
The factoring loan solves this dilemma. Offer extended terms to your customers, but still get cash up front.
In factoring there are three parties involved -- you, your customer and the factoring company. The factor enters into the middle of the transaction.
They purchase your invoice at a discount and then send that invoice to your customer. Your customer pays the invoice as they normally would, except that the payment is made to the factoring company. The factoring company then sends you the balance of the invoice minus their fee.
There are several side benefits to this type of financing that you aren’t able to get with a traditional bank loan. With factoring, you get more than funding for your business. You get a full-service back office that assesses the credit risk of your customers, monitors performance and payment activity, and follows up on past due invoices.
With factoring you:
- Improve the cash flow of your business
- Know which customers pose the largest credit risk
- Have an outsourced team to pursue collections when necessary
- Sleep well knowing there are funds available to make payroll
- Take advantage of year-end tax planning, such as buying inventory in bulk
- Stay on good terms with your vendors and take advantage of early-pay discounts
Factoring is more than a business loan. It is a partnership with a factoring company. Because of this, be sure to do your due diligence on the finance company that is providing the factoring loan. You should feel confident in their ability to underwrite your customers, understand your business and deal with your customers with the upmost professionalism.
When done right, factoring is a tremendous asset to your business.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Schedule a demo below for a more thorough explanation of factoring loans, or call 888.833.2286 to speak with one of our small business finance consultants.