When most business owners are looking at short term business loans they are only looking for a source of business funding. They don’t stop to consider what the finance company provides outside of additional capital.
Truthfully, with some types of loans there isn’t much else to consider. If you get a line of credit from a multinational bank, you’re just a number on a spreadsheet, a name in a massive database. You’re lucky to just get basic customer service, much less access to value added services to help maintain and grow your business.
That’s not the case though when you work with specialty finance companies. One form of specialty finance that provides benefits unlike any other business loan is factoring.
How Does Factoring Work?
Factoring is a type of business loan that is specifically designed to boost your working capital. It allows you to get cash for your accounts receivable before the invoices are paid.
A factoring company will purchase your accounts receivable and advance a certain percentage against them. This frees up a significant amount of cash that would otherwise be tied up in your accounts receivable.
When your customer pays the invoice that was assigned to the factoring company, you receive the balance of that invoice minus the fee that the factor charges.
Your Factoring Company Becomes Your Business Partner
Working with a factor is unlike any other type of business funding. It isn’t simply a short term loan. The factoring company works directly with your customers. They have a strong interest in the creditworthiness and performance of your customers. Likewise, you should have a strong interest in professionalism and level of service that the factor provides.
In factoring, repayment comes from your customers. You receive an advance when you invoice and that advance is repaid when your customer pays the invoice. The factor is very concerned with your customers’ ability to pay. This concern provides several benefits for you.
Whether you realize it or not, you’re in the business of loaning money. Every time you invoice you’re essentially issuing a short term loan. Your good or service was provided for the promise to pay a certain amount on a future date. Do you assess the credit quality of each of your customers before you invoice? Most businesses don’t.
A factoring company has a team dedicated to assessing the risk of your customer base. While it’s primarily for their benefit, you benefit as well. You’ll quickly find out when your factor discovers a customer with credit issues.
Collections are one of the most dreaded activities in doing business. If you’re handling it yourself you know it takes a significant amount of time. If you have someone on your team that takes care of collection calls, then you know that there is a real cost to pursuing past due invoices.
When you work with a factoring company, the amount of time and money you spend on collections will be reduced drastically. The factor has issued an advance against an invoice and needs that invoice to be paid. Many factors have a dedicated department for dealing with past due invoices.
A final benefit is the flexibility that factoring provides. It gives you full control over your funding and the associated fees. If you’re in a pinch to finish a project or just need a little extra cash to make payroll, you can factor one or two invoices. You get the exact amount of cash you need without paying for funds you aren’t using.
This flexibility has a real impact on your bottom line.
Working with a factoring company comes with benefits that you won’t get with any other kind of financing. Don’t ignore the additional value these benefits provide when deciding how to fund your business.