Commercial FinanceCommercial Finance Blog

Factoring for Small Business

By 03.11.21March 26th, 2021No Comments
Dip Financing

Why Would A Small Business Use a Factoring Service?

When your small or mid-sized business needs fast, flexible working capital financing, factoring companies provide needed cash flow. A small business factoring company takes on the burden of waiting for accounts receivable invoice payments and in return, provides your business with a timely cash advance. Invoice financing for small business is sometimes referred to as receivables financing or invoice factoring and is a flexible and fast alternative to traditional bank business loans.

Factoring is when an accounts receivable invoice is sold at a discount by your business to a factoring company. Banks traditionally require a burdensome approval process to loan money. That loan will bear interest at market-driven interest rates and results in debt for a small business. Reputable factors start approval within 24 hours without subjecting your business to the volatility of bank interest rates or adding debt on your company’s books.

Small businesses that often benefit from factoring services include those that face scenarios such as funding required to maintain substantial inventory or materials for production; long-duration sales cycles; volatile cash flow; slow-paying customers, such as large corporate buyers or government agencies; and seasonal sales. In fact, factoring fuels your business growth when your company is presented with certain opportunities. Factoring might help your business if you’re experiencing unanticipated or urgent customer demand for products or services like we’ve seen during the pandemic. Timely opportunities to expand into emerging markets is another scenario where factoring can help. As well, if your company has created innovations that offer a chance to invest in new technology and equipment, and options to expand offices, production workspace or inventory warehousing, then you would likely benefit from factoring services.

When a company faces short-term risk jeopardizing business operations due to a cash flow crunch, small business factoring is a remedy for:

  1. Operating losses
  2. Payroll funding needs
  3. Maxed out lines of credit
  4. Bank turn-downs

Invoice factoring also supports the strength of your company with cash liquidity when your business goals are to:

  • Obtain immediate cash to finance any business use without creating debt;
  • Startup a new venture or line of business with no financial track record;
  • Infuse cash into your business as if using it as a bridge loan;
  • Improve your company’s business credit rating;
  • Benefit from trade discounts;
  • Make timely tax payments; and
  • Handle State tax or Federal tax liens.

How does Factoring Compare to a Bank Loan?

A factoring company can provide an approval process that gets started within 24 hours. An alternative to the often lengthy and trying vetting process of applying for traditional bank financing, a resourceful factor is nimble and well-positioned to provide funding with urgency. Due diligence for small business factoring funding focuses on the fiscal health of your customers, whereas banks analyze and weigh the pros and cons of a company’s assets, net value, and creditworthiness. The best news of all is that funding provided by a reputable factoring company happens within three to ten business days of a signed agreement for a new client. An existing client can receive funding as fast as the same day.

How does Invoice Factoring Provide Security for Business Finances and Accounts Receivable Management?

A factor typically advances up to 90% of the amount of an invoice to your business upon confirmation of your billed customer’s credit worthiness. Once your customer pays an invoice in full, the factor pays your company the balance due for the invoice after first retaining any fees for the transaction.

The factoring agreement between your company and the factor will define terms and conditions, such as:

  • The rate at which funds will be advanced to your company against the net amount of your customer’s invoice;
  • A predetermined maximum amount of funds available to be advanced, also known as the factoring line;
  • Factoring fee, or discount fee, based on a percentage rate of the value of the factored accounts receivable and variable according to invoice terms;
  • Any necessary terms, charges, and fees to mitigate risks and cover costs for administration and management of the factoring arrangement; and
  • Length of duration of the factoring arrangement.

A factoring agreement provides many valuable benefits like maintenance of accounts (ledger) related to factored receivables and collection of receivables, protection of your company against default by account debtors with non-recourse factoring (where the factor takes on the risk of nonpayment for invoices due to the account debtor’s financial inability to pay) and accounts receivable credit protection against account debtor bankruptcy.

When your small business turns to a factor for financing, your company benefits from flexibility for financing company operations, a fast and efficient funding alternative to bank loans, and the security for business finances and accounts receivable management provided for by your factoring arrangement.