Factoring Loan: Finance Made Easy
Businesses need funding to survive. You have to have cash to purchase inventory, pay employees and cover overhead. I have, unfortunately, seen many businesses struggle due to inadequate funding. When cash is tight for an extended period of time, there comes a point where you, as a business owner, have to make tough decisions about your business.
How do you avoid this situation? How do you ensure that you’ll have ready access to the capital that is so vital to the success of your business?
The Basics of Business Funding
When it comes to financing there are a lot of avenues you can pursue. You can go the equity route and seek investment from family, a contact within your network or a more organized equity group. You can also get traditional financing from a bank or finance company.
As far as traditional financing goes, it’s very difficult for a small business to get a loan from a bank. If you’re a start-up, it’s practically impossible. The only option that most banks will provide to a small business involves using your personal assets as collateral.
A third option is a factoring loan, which is a finance method that is specifically designed for small businesses.
What is a Factoring Loan?
A factoring loan is a tool that gets you the funding you need to keep your business running. It is a key that unlocks the cash that is tied up in your accounts receivable. It takes the guess work out of how long your customers will take to pay.
Most businesses need to offer terms to their customers in order to retain their business. You want to maintain a good relationship by offering them favorable terms. The problem is, if you provide terms that are too long then it puts you in a cash crunch. If you keep terms too tight, customers will go find someone else who can accommodate them.
The factoring loan solves this dilemma. It allows you to offer generous terms to your customers without impacting your cash flow.
How Does Factoring Loan Work?
Factoring is a slight twist on your regular invoicing process. Rather than sending your invoice to your customer, you submit your invoice to the factoring company. The factoring company forwards the invoice to your customer and advances you a certain percentage of the invoice amount.
When the invoice is due, your customer pays the factoring company directly. When the factor receives payment, they will send the remainder of the invoice to you less their fee. The entire process is quick and seamless.
Benefits of the Factoring Loan
Aside from the obvious benefit of having access to cash more quickly, the factoring loan provides a number of additional benefits. Since the factoring company is relying on your customers to repay the advance made to you they are constantly monitoring the performance and risk of your customer base.
With factoring you can:
- 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 that 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.
Choosing a Factoring Company
Be sure to fully understand the factoring company you’ll be working with. You need a company that you feel comfortable with. You should feel confident in their ability to underwrite your customers, understand your business, and deal with your customers with the upmost professionalism.
The relationship you have with a factor is much closer than what you would have with a traditional bank. Don’t be afraid to ask questions. You should be completely comfortable with the company.
When you find that perfect factoring company, you find that a factoring loan is a tremendous asset to your business.