Dip Financing

Factoring for Small Business

Last Modified : Jun 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 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 creditworthiness. 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.

What is Non-Recourse Factoring?

Unlike traditional factoring, in non-recourse factoring, the factor assumes the risk of non-payment 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 non-payment 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.

ABOUT eCapital

Since 2006, eCapital has been on a mission to change the way small to medium sized businesses access the funding they need to reach their goals. We know that to survive and thrive, businesses need financial flexibility to quickly respond to challenges and take advantage of opportunities, all in real time. Companies today need innovation guided by experience to unlock the potential of their assets to give better, faster access to the capital they require.

We’ve answered the call and have built a team of over 600 experts in asset evaluation, batch processing, customer support and fintech solutions. Together, we have created a funding model that features rapid approvals and processing, 24/7 access to funds and the freedom to use the money wherever and whenever it’s needed. This is the future of business funding, and it’s available today, at eCapital.

eCapital Logo

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.

More Great Reads