Tag Archives: Factoring For Small Business

The Determining Factor for your Business

When your business is in a cash crunch, there are very few practical ways to get funds without incurring debt. Over the years, taking out a loan has been the only method preferred by business owners, since there were few alternatives available to them. Now things have changed, and the same old approach for commercial financing is no longer the option, specifically for small and medium businesses. With banks not lending money as readily, it has become quite difficult for businesses to get working capital for daily business expenses. This is frustrating for businesses as lack of funds causes them to struggle to meet their short term obligations. As a result, these companies can’t capitalize on growth opportunities and remain stagnant. Some even contemplate shutting down their businesses. Before taking such extreme steps, companies should look for secondary financing options to bring cash flow back into their businesses. One of the most feasible options in this context is accounts receivable financing.

If you own a small or medium size business and are able to deliver quality products and services and you have reputed clients and a good infrastructure, then accounts receivable financing could be of great help to you. Asking for a bank loan to increase the line of credit could well be a futile effort as most banks are turning down loan requests. Even if you qualify for a loan, it could only be a temporary solution since you will be borrowing money and will need to pay it back along with interest. In this situation, you can utilize your accounts receivables as collateral to get the working capital you need, without incurring debt. Furthermore, your company’s weak cash to debt ratio, credit history and profit margins won’t create an obstacle for receiving such funding. You will be selling your invoices to a factoring firm that will pay you an advance amount (40% to 90%) based on the invoice’s face value and aging.

The methodology of factoring is based on selling your assets (invoices) to a factoring company, at a discount. This is neither a loan nor a line of credit, rather it is an asset sold with the convenience of receiving money in 4 days. You may choose to factor one invoice, which is called spot factoring or you can sell multiple invoices. This way of funding can bring a great solution to your ongoing funding woes and will make your company’s balance sheet look healthy.


No One to Turn to for Cash? Go for Factoring

Are you looking to broaden the activity-based management to fine tune your business’ resources and operations? Are you unable to get ahead since you are having a cash flow shortage? This is a typical ‘cash strapped’ situation that small businesses often face. An organization’s current cash flow reflects its financial health as well as determines its short-term capability, including paying employees’ salaries, bills for office maintenance and other operational expenses.  If your business is stuck in a similar situation, you can find a way out by using your business’assets. There are factoring companies that provide accounts receivable financingfor small business to bail them out. The assets are your invoices, against which your customers will pay after the given terms like 15, 30, 45 days, etc. are completed. These assets, and can be sold to get quick cash.

The companies that buy the invoices are called factors. A factor will give out an advance of the invoice amount, usually ranging from 40% to 90%, and the amount will be paid immediately after verifying the credit worthiness of the billed customer. For example a factor advances 70% of a credit qualified invoice to a client, when the customer pays the invoice in full for example in 30 days,  the factoring company remits the balance amount of 30% less the 5% discount fee to the client,  Discount fees usually range between 2.5% to 7%. The turnaround time of a factoring firm is pretty quick (4 days if applying for the first time) and 24 hours on subsequent transactions, whereas a bank will take a long time just to evaluate your application. Most importantly, getting cash through factoring is not the same as taking out a loan; rather it’s like selling your assets to a third party that is responsible for funding directly to your business.

Also, while applying for a bank loan, you may get concerned about your credit history. Banks are hardly approving loan applications from small businesses due to stringent government regulations on lending. While buying your invoices, a factoring firm won’t be worried, even if you have a limited or blemished  credit history. They always more interested in  your customer’s credit worthiness.

Billions of dollars are transacted in accounts receivable through the factoring companies every year. Most of the industries such as manufacturing, telecommunication, construction, wholesale business, logistics etc. are financed by various factoring companies. Some organizations utilize account receivable financing to meet their cash flow needs as a stop-gap measure. Other small businesses prefer factoring to banks to avoid the hassles, paper work and delay in processing.

Small businesses that intend to expand their businesses overseas may find financing through factoring more useful than taking a loan from a bank. Professional factoring firms have extensive experience in dealing with the suppliers or purchasers abroad. So, using factor services could ease the rigor of the international business endeavors by removing the obstacles related to cash flow needs.