Factoring Business – When Should You Work with One?

As a business owner, you can appreciate the need for steady cash flow. You have bills to pay, employees to compensate, vendors to satisfy, suppliers who need cash, and more. Working with a factoring business can help ensure that you have that stable cash flow. When should you consider working with a factoring company, though? Is there a situation that is better suited to this type of financing? Are there situations in which you might be best served with a different solution?

Your Customers Are Slow to Pay

Chances are good that you’ve been in a situation where your customers were slow to pay. It’s pretty much business as usual for some customers to take 30, 60 or even 90 days to pay an invoice. However, that “business as usual” aspect does not make it any easier for your company to make it through when you need money to pay your own bills. Working with a factoring business can ensure that you have access to your capital now, rather than later.

Factoring BusinessSlow paying customers can cause a number of problems within your own business, including:

  • An inability to pay employees/staff
  • An inability to source more product/inventory
  • An inability to pay creditors
  • An inability to pay vendors, suppliers and other business partners
  • An inability to focus on growth, causing stagnation

If any of those sound familiar, you can benefit from working with a factoring business.

You Need Cash Quickly

For many consumers, it seems like businesses would have all the capital they need pretty much at hand. After all, if you’re successful, then your customers are paying you, and your business is turning a profit. However, most consumers don’t realise that business profit is generally locked up – it’s locked away in unpaid invoices, tied up in infrastructure, held in assets like equipment, facilities and more.

So, while your business might be pretty successful on paper, there’s not a lot of liquid capital available. This can make it difficult to meet your own financial obligations. Working with a factoring business can give you cash quickly, often within 24 hours of selling an invoice to a factoring company.

You’ll receive between 70 and 90% of the invoice’s value upfront, and then the remainder (less the factoring fee) after your customer pays the invoice. If you can benefit from cash immediately to create more liquidity within your business, this could be an excellent opportunity for you.

Bank Financing Is Not Possible

Conventional bank financing is often the wrong answer for a business seeking liquidity, particularly if your business is new, small, or has had credit problems in the past. This is also true if you’re in an upward growth cycle and need cash quickly in order to make the most of that growth.

With bank financing, you’re taking on additional debt. That’s never a good thing. However, a factoring business doesn’t add more debt to your books. Instead, you’re selling an asset, and that means there’s no negative impact to your credit.

Of course, there’s also the fact that most small business owners today don’t qualify for financing through a bank. Conventional lenders have tightened their policies to the point that if you don’t have perfect credit, you’re out of luck.

Even if you do qualify for a loan, you have a long time to wait before you can use that capital. In some cases, you might have to wait for months between shopping around for the right lender, comparing loan options, applying for a loan, and then waiting while the lender determines whether or not to loan you the money.

While you’re waiting, your expenses are piling up. It’s also possible that this long wait will make it difficult or even impossible to focus on growth, or it could stymie growth, reducing your success.

By working with a factoring business, you’re able to take a shortcut to obtaining the capital your business requires.

You Don’t Want to Use Outside Sources

While conventional loans are available from banks and other lenders, many business owners turn to other financing options due to a lack of credit, or other considerations that make business loans poor choices. Often, they turn to outside sources – investors.

While investors can definitely help ensure that you have access to capital, they require a lot in return. You’re essentially selling them part of your company, which means that they will most likely have a say in how things are run in your business.

Even if they don’t have a say, it means that you’re beholden to yet one more person. Working with a factoring business ensures that you don’t have to take on any other investors, and you don’t have to give up any degree of control over your own company.

There’s an Immediate Opportunity for Growth

Growth opportunities do not always come at the end of a long chain of decisions. Sometimes, they occur very quickly. You need liquidity to ensure you’re able to act when that happens. However, if your profit is tied up in unpaid invoices, you won’t be able to take advantage of those opportunities when they present themselves.

A factoring business can ensure that you have the cash you need immediately, meaning there’s no concern that you’ll miss an opportunity because you didn’t have the cash on hand.

Expanding Internationally

Business growth is your goal. However, if you’ve gotten to the point that expanding into an international market is possible, you may find that you lack the human capital to make that happen. Dealing with international clients, handling invoices and the like can be very complicated.

According to the Wall Street Journal, “Companies wanting to expand overseas may find factors often already have extensive experience dealing with overseas suppliers or purchasers and so using factors can make international business efforts a lot easier.”

Handling Invoicing Needs

For small business owners, there’s a significant need to wear many hats. Your staff is limited, and you’ll have to play a number of roles within your business, including handling invoicing and accounts receivable. You could hire employees to handle this for you, but that will incur additional costs in the form of payroll, benefits to be paid, and more.

All too often, small business owners find themselves forced to handle these duties on their own, which means less time spent actually running their business. Working with a factoring business can actually help here, as many factors will actually take over collections, which means that you will not have to worry about staffing, billing or even credit checking. This streamlines your process, ensures that you have time to grow your business, and still see steady cash flow.

Early Payment Discounts

Often, you’ll find that suppliers and other vendors with which you do business will offer discounts if you pay your bill early. Of course, that can be impossible to do if your capital is locked up in unpaid invoices. Working with a factoring business can give you the cash necessary to pay your vendors or suppliers early, saving you money in the long run. Depending on the amount you owe your suppliers, this can add up to significant savings, particularly when factored over a period of time.

You’re Building Your Company’s Credit

For new businesses, as well as many established small businesses, building credit can be a tricky prospect. While not all factoring companies report to credit agencies, many do. This can provide you with a way to build your company’s credit so that you’re able to work with banks and other conventional lenders later on down the road.

When Is Factoring Not Right?

While working with a factoring business can be a great option for a very wide range of companies, it’s not the right fit for all of them. There are instances when working with a factoring business is the wrong choice. These include the following:

  • Lots of Low-Value Invoices: If your company only has low-value invoices outstanding, chances are good that you will not benefit from working with a factoring business. The cost of factoring will outstrip the value you gain from having access to early cash flow. In short, the fees might cost more than what your customers owe you.
  • You’re Very Established: If your company has a very established history and reputation, and your credit is in good shape, it might be better to consider bank financing. While a factoring business can give you access to capital much more quickly than a bank, remember that there will be a factoring fee that costs between 1 and 5% of the invoice total. That applies to every invoice that you factor. There may also be other fees charged by the factoring business that increase costs. In this situation, working with a bank might be the better, albeit slower, option.
  • Your Customers Are Risky: If your customers have a history of paying their invoices after the due date, or otherwise pose a financial risk, it might be best to avoid working with a factoring business. This is because factors may not be willing to take on your clients if they’re risky, or they might charge higher fees, increasing your costs. There’s also the possibility that you’ll only have access to recourse factoring, which means that you’re responsible for paying back the money if your client defaults on the invoice. That can put a cash-strapped business in a dangerous position.
  • You Don’t Want to Give Up Control: While working with a factoring business won’t cost you control of your company the way bringing in an outside investor will, there is the chance that you might have to give up some control over invoicing and billing. You’re essentially selling unpaid invoices to the factoring business, and the company will handle collecting from your customers. This may or may not be the right fit for your specific needs, so consider it carefully.

In the end, working with a factoring business is more expensive than conventional financing. However, if you cannot qualify for a loan through a bank, that doesn’t matter. There’s also the fact that working with a factoring business generally provides you with access to many services that you’ll never find with a bank or other conventional lender, such as invoicing and accounts receivable.

Specialised factoring companies also often provide additional services tailored for the industry they serve. For example, a factoring business that specialises in the trucking industry might offer benefits in the way of fuel for trucks, while one that specialises in the clothing industry might provide assistance with logistics. Of course, not all factoring businesses provide these additional services, so it’s up to you to shop around for the right fit, and the ideal mix of benefits.

Finding the Right Factoring Business

Given that there are many factoring companies operating in Canada, it can be very difficult to make an informed choice for your business. You’ll discover that just comparing your options is a lengthy, sometimes frustrating process. Moreover, if you’re unfamiliar with what sets one factoring business apart from another, there’s a very real possibility that you will choose one that’s more expensive than necessary, or one that doesn’t have a great reputation.

This is where we come in. We invite you to take advantage of our free consultation with a factoring specialist. Let us help you form a financially rewarding relationship with the right factoring business.