Small Business Factoring in 2013
The economic environment in 2013 looks significantly different than it did two or three years ago; however, many businesses are still finding themselves struggling. In the first 3 months of 2013, the U.S. gross domestic product (GDP) grew at a rate of 2.4 percent. While we’re certainly past the recession, wherein GDP declines, it’s well below what’s considered a normal growth rate of 3 percent.
In order to see a true recovery, we need to see GDP growth edging towards 4 percent, which hasn’t occurred since the second quarter of 2009. The point is the economy is certainly better than it was a few years ago; however, it’s still an uphill climb to reach the point we were at before the recession. Many companies see business improving, but cash is still tight.
Using Small Business Factoring
Small business factoring is a great way to improve the cash flow of your business while avoiding many of the impediments that come with traditional financing from a bank. With factoring, you’re not paying high interest rates, dealing with restrictive loan covenants, or preparing volumes of reporting. You’re simply selling an invoice to a finance company.
Factoring is all about creating cash flow for your company. It eliminates the most significant unknown in your cash flow cycle – How long will my customers take to pay?
How Small Business Factoring Works
Factoring is a very straight-forward process. You submit an invoice to the factor, who will advance a percentage of the dollar amount of the invoice. Your customer is notified that the invoice has been assigned and that payment should be sent to the factor. Once the invoice is paid, you receive the remaining proceeds from the invoice less the fee charged by the factoring company.
In short, small business factoring allows you to access the cash that is tied up in your accounts receivable. It allows you to leverage what is likely the largest current asset on your balance sheet. It gives you the ability to keep your business moving even in a cash crunch.
Factoring Improves Efficiency and Cuts Costs
With the economy expected to remain weak over the next several quarters, controlling costs is paramount. Nothing kills a business faster than high fixed costs coupled with declining or uncertain revenue. Implementing programs to reduce your fixed costs gives your business flexibility to weather weak periods.
Small business factoring offers ancillary benefits which improve efficiency and cut costs. The most significant benefit is risk assessment.
Extending credit to customers is inherently risky. You are providing a product or service, which costs you real dollars, based on a customer’s promise to pay at some point in the future. Even when dealing with a large, financially sound firm, prompt payment is not guaranteed. Do you have a credit profile on each of your customers? How confident are you that your customers will pay in full and on time?
If you aren’t assessing the risk of a customer before you extend terms, you should be. The resources to perform that due diligence carry a real cost. Most small businesses don’t have the resources to do this due diligence properly. If you chose to forego the process altogether, you aren’t saving money – you’re just deferring that cost to a future date. That future date when one of your customers goes bankrupt and isn’t able to pay you for the thousands of dollars of product that you shipped to them last month.
Factoring gives you insight into the credit quality of your customers. For their own risk management, a factor will evaluate all customers you submit to them. The cost for this service is built into their pricing, turning risk assessment into a variable cost for you.
Seeing Your Business Thrive in 2013
Small business factoring gives you the tools you need to see your business thrive in 2013. The cash flow boost that factoring provides gives you the agility and flexibility you need to navigate an uncertain economic environment. Don’t settle with surviving the year. Give yourself the tools to grow and thrive despite the issues outside of your control.