Running a small business is a never-ending process of putting out fires. You look up at the end of the day and there’s still a dozen things that need to get done. When you’re running from one task to the next it’s easy to miss important things like cash flow planning. It’s times like these that having a factoring company on hand would relieve a lot of stress.
A factoring company takes the biggest unknown out of your cash flow planning. When will your customers pay? The timing of those cash inflows is paramount to keeping your business running. A business without cash is like a scuba diver without air – you aren’t going to last very long!
When you don’t have a pile of cash on the side to fall back on (something few small businesses have), payroll and other important payables can keep you up at night. Factoring lets you unlock the cash that’s tied up in your receivables, which you can then use to keep your business running.
How Factoring Works
Factoring is incredibly simple. A factoring company purchases your receivables from you at a small discount. You get cash as soon as you invoice while the factor bears the burden of waiting for payment from your customers. When your customer does pay, you get the balance of the invoice less the fee charged by the factor.
Factoring is an affordable and straight forward way to get the cash you need to run your business.
Factoring Frees Up Your Resources
It’s not unusual for a small business to have more work than their staff can handle. It’s a constant battle of addressing the most important things first and hoping everything else gets taken care of somewhere down the road.
A factor provides more than funding, it’s provides support in key areas of your invoicing and collection processes.
A factoring company:
- Assesses the risk level of your customer base (many small businesses don’t do this at all!)
- Handles the process of sending out invoices – both electronically and via physical mail.
- Tracks invoices as they age out.
- Follows-up on past due invoices.
- In some cases, a factor may assist with collection efforts if an invoice goes unpaid.
If your business is already doing all of these things, a factoring company frees up that personnel to work on other tasks. If you aren’t doing those things, then you should be! It’s important that a small business has an efficient process to manage their receivables. An inefficient receivables process will cost you in both lost revenue and increased expenses.
Factoring Grows With Your Business
The funding you receive from factoring is tied directly to the dollar amount of the receivables on your books. When you have financing that is based on your accounts receivable, your financing grows as your business grows. Factoring facilities don’t typically have a hard cap like you would find in a traditional line of credit.
This makes factoring a perfect tool for growing businesses. As long as your customers’ credit supports the increasing balance, you can continue to factor as your AR grows. If you were to work with a traditional lender, at best a line increase would involve an amendment to your loan agreement. At worst, you’ll endure the time and expense of a full re-underwriting of your loan that still ends with a denial.
Factoring Has the Tools You Need to Win
Winning in a small business is about using your limited resources to achieve maximum results. Part of this is related to how well you manage the resources you have and part of it is leveraging those resources to get the best bang for your buck.
Factoring is that leverage to move more with less. When your cash turns quickly your business can be flexible and agile. You have the ability to move quicker than your competitors and seize opportunity when it arises. Those qualities are what cause businesses to win.