Factoring for Small Business

eCapital Corp

Last Modified : Sep 18, 2024

Fact-checked by: Bruce Sayer

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 factoring for small business is sometimes referred to as receivables financing or invoice financing and is a flexible and fast alternative to traditional bank business loans.

Factoring is when your business sells an accounts receivable invoice at a discount to a factoring company. Banks traditionally require a burdensome approval process to loan money. That loan will bear interest at market-driven interest rates, resulting in debt for a small business. Unlike banks that typically take weeks or months to process loan applications, reputable factoring companies start their due diligence within 24 hours and generally complete the approval process in days. The result is a quick financing solution without subjecting your business to the volatility of bank interest rates or adding debt to your company’s books.

Factoring for small business benefits SMBs 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. Factoring provides access to capital when your company is presented with growth opportunities. Factoring for small business might help if you’re experiencing unanticipated or urgent customer demand for products or services like many companies experienced during the pandemic. Timely opportunities to expand into emerging markets is another scenario where factoring can help. Also, if your company needs to invest in new technology or equipment, has 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, factoring for small business is a remedy for:

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

Factoring for small business 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.
• Start 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.
• Handle State tax or Federal tax liens.

How Does Factoring for Small Business Compare to a Bank Loan?

A factoring company can provide an approval process that starts 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. The due diligence process for factoring for small business focuses on the fiscal health of your customers. In contrast, banks analyze and weigh the pros and cons of a company’s assets, net value, and creditworthiness. The best news 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 Factoring for Small Business 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 creditworthiness. Once your customer pays an invoice in full, the factor pays your company the balance due for the invoice after retaining transaction fees.

A factoring for small business agreement 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.
• Length of duration of the factoring arrangement.

A factoring for small business 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 you utilize factoring for small business, 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.

What Is Non-Recourse Factoring?

Unlike traditional factoring for small business, in non-recourse factoring, the factor assumes the risk of nonpayment by the original debtor. If the debtor doesn’t pay the invoice, the business is not required to repay the factor. This method allows businesses to obtain immediate liquidity without the liability of potential nonpayment by their customers. Not all companies that offer non-recourse factoring cover the same liabilities. You can find some things to look out for in our blog Top 8 Things to Understand Before Signing A Non-Recourse Factoring Agreement.

Conclusion

Factoring for small business provides a flexible and rapid alternative to traditional bank loans. By converting accounts receivable into immediate cash, businesses can overcome cash flow challenges, manage financial needs, and seize growth opportunities without incurring additional debt. With fast approval and funding, factoring offers a practical solution for addressing operational losses, expanding into new markets, or investing in innovation. Additionally, non-recourse factoring protects businesses from the risk of nonpayment by debtors, enhancing financial security. Overall, factoring can be valuable for maintaining liquidity and supporting business growth.

Key Takeaways

• In an invoice factoring arrangement, the factoring company takes on the burden of waiting for accounts receivable invoice payments and, in return, provides your business with a timely cash advance.
• When a company faces a cash flow crunch, factoring for small businesses can address operating losses, payroll needs, maxed-out lines of credit, and bank turn-downs.
• In a non-recourse factoring arrangement, the factor assumes the risk of nonpayment by the original debtor. If the debtor doesn’t pay the invoice, the business is not required to repay the factor.
• Factoring for small business can be a valuable tool for maintaining liquidity and supporting business growth.

eCapital Corp

eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.