Factoring for Business – How it Works and Its Value to You

Struggling with cash flow problems within your business? You’re definitely not alone. Small businesses, start-ups, and even established firms can find it difficult to maintain liquidity, particularly when their customers may take 30, 60 or even 90 days to pay their bills. There is an answer, though. Factoring for business allows you to sell those assets (invoices) to a factor in exchange for the cash you’re owed. What sort of value does factoring for business have to you?

What Is Factoring for Business?

Before we touch on the value of this practice for your company, we should define what factoring for business actually is. It’s a powerful financial tool that allows you to enjoy stable cash flow through your business without the need to work with a conventional lender. Essentially, you sell your invoices to a factor. The factor then pays you between 70 and 90% of the invoice value (note that this percentage can vary significantly from one factor to another).

Factoring for BusinessThat cash is immediately available to you after the sale has been processed, which may take as little as 24 to 48 hours. Once your customer pays the invoice, the factor then submits the remainder of the amount to you. The only thing you usually have to pay is a factor fee, which often comes to 1 to 5% of the invoice total (again, this varies from factor to factor).

This allows you to avoid dealing with lenders, but ensure that you have the cash flow necessary to operate your business. As such, it can offer value in many different ways.

Paying Your Bills

When you have customers, but they’re slow to pay their bills, it creates significant problems for your business. You have to put off paying your own bills. That can create quite a few issues. For instance, you need to pay your employees, as well as your own creditors. You have other expenses that need to be paid, as well, from insurance to utilities and everything in between.

Factoring for business allows you to sell invoices to factoring company and receive the cash that you’re owed, often within a single business day if all the required information is provided at the time of the sale. Ensuring that your company’s financial obligations are met keeps your relationships with vendors and suppliers positive, and also helps prevent damage to your creditworthiness.

No Credit Worries

Many new business owners find that their lack of history means that banks and other lenders are not willing to take a risk on them. Some discover that their personal credit problems affect their business, too. In these instances, being denied a business loan can be devastating – it could mean the difference between staying in business and closing your company’s doors. Because factoring for business doesn’t hinge on your credit history or your company’s creditworthiness, there are no worries that you’ll be denied for a factor line.

Faster Growth

You have to spend money to make money, as the saying goes. If your customers are waiting 30, 60 or 90 days to pay their invoices, you are missing out on numerous opportunities for growth that might not be available when your cash flow situation is corrected. For example, you might need to hire more employees to meet growing demands from your customers, but if your cash flow is stymied because you’re waiting for payment, that might not be possible.

If you’re unable to hire more employees, you fail to meet that growing demand, and potential customers will turn to a competitor that is able to serve their needs. Obviously, that’s a bad situation in which to find yourself, but factoring for business can ensure that you have reliable cash flow for growth and expansion.

Get Discounts

Slow invoice payment is actually relatively common in the B2B world, and your suppliers know that. This is why a number of them offer discounts for fast payment. Taking advantage of those discounts can save your business a lot of money, but if you’re waiting on your own customers to pay you, before you can pay your suppliers, you’ll never be able to take advantage of those discounts.

By using factoring for business, you can get the cash you need to pay your suppliers, realise discounts and build a stronger relationship with them all at the same time. Additionally, because you can sell multiple invoices, this can provide you with ongoing cash flow to ensure that you’re always able to pay suppliers early and save money.

Financing Your Production Cycle

Whatever it is that your company produces, it requires capital. You need cash for supplies and raw materials. You need cash for manpower, distribution and delivery, and every other step along the way. If you’re stuck waiting for your customers to pay their bills, it can slow down or even halt your production cycle. With factoring for business, you get immediate cash that can be channeled back into your production needs, allowing you to ramp up operations, serve more customers, and grow your business.

Without factoring, growth would be slow, or perhaps even nonexistent. It would prohibit you from taking on new customers, and possibly even from serving existing customers. Working with a factoring company ensures that you have the cash that you’re owed without having to wait a month, two months or even three months for slow paying customers to get around to handling their bill.

Take Advantage of Opportunities Immediately

Business opportunities come along when they’re least expected. You might find that you’re presented with a great deal on a prime piece of real estate that would allow you to expand your business and serve an entirely new population.

However, if you lack the capital to act on that opportunity because you’re waiting for your customers to pay their bills, you’ll miss out. You can bet that your competition will seize the chance to buy that real estate. It might not be property-related at all, though. Perhaps you have the opportunity to invest in new technology that would make your production less costly, but speed up the process at the same time. Maybe it’s an opportunity to branch out into a related vertical or niche.

Whatever the case, if you lack the capital to take advantage of the opportunity, you’ll have to pass and sacrifice growth simply because your customers haven’t paid their bills yet. Factoring for business ensures that you always have a reliable flow of cash into your business for use as you need it. It’s your money, after all.

You can use it to expand your business, buy new machinery or equipment, invest in new infrastructure, purchase real estate and more. And, it lets you do that when the time is right, without waiting for your customers to pay.

No New Debt

As a business owner, you’re familiar with debt. Chances are good that you had to take out a loan to get your business started. You know how it feels to be obligated to a creditor, and the sense of frustration that comes from worrying about whether or not you’ll be able to make your payments on time, every time. Loans are just debt – you’re leveraging your financial future against having cash today. It’s not a great place to be.

Using factoring for business ensures that you’re able to get the cash that you need without having to take on yet more debt (assuming that a bank would approve a loan, of course). Because the invoices sold to the factoring company are assets, you’re not taking on additional debt. You’re selling for a profit (the cash that your customers owe you). This provides you with liquidity without a corresponding increase in your financial burden.

Imagine having the capital to hire more employees, buy new equipment, or grow your company without being further obligated to a lender. It’s definitely freeing.

No Need for New Staff

Small business owners generally operate with as few employees as possible. You likely wear several hats, including decision maker, chief financial officer, bill collector and salesperson. However, as your business grows, you’ll find that managing your accounts receivable becomes basically a fulltime job in its own right.

In order to free up your time to refocus on building your business (what you do best), you might be tempted to hire employees to handle your receivables management. The problem here is that more employees equates to more costs – you have payroll, benefits and the like that must be accounted for. When you’re dealing with limited cash flow, this can overtax an already strained business.

Factoring for business allows you to avoid this situation. Many factoring companies do more than just offer an infusion of cash in exchange for an invoice. They can provide professional, comprehensive support services, including collections, invoicing and receivables management to name just a few. When you consider specialised factoring companies that focus on specific industries, the range of services offered grows considerably.

It’s easy to see the benefits of factoring for business in this instance – you gain more than just cash flow. You can extra time, and professional assistance in an area where you have little or even no expertise.

Avoid Maxing Out Lines of Credit

If you have a current line of credit with a bank, you know the struggles involved with just maintaining it, much less convincing your lender to increase it. This can limit your growth by forcing you to turn down large orders (you’re essentially undercapitalised). Of course, maxing out your line of credit does you little good, because it tells the bank that you’re struggling to achieve business goals.

They don’t really care why you’re struggling. They just see that you are, and that increases your level of risk. As your risk goes up, so does the interest rate you’re charged, and the less likely lenders will be to work with you in the future. With factoring for business, there’s no business credit involved at all.

The entire process is based on your customers’ creditworthiness and ability to pay – not yours. You can sell invoices to a factor, obtain the cash you need to expand and grow your business, and avoid maxing out your line of credit and damaging your standing with conventional lenders.

There’s also the fact that lines of credit can only be extended as far as your business’ credit limit. After that, you’re out of luck. That can stymie business growth. However, with factoring for business, your cash flow grows as your business grows. It’s completely scalable, ensuring that you always have an influx of capital to foster stability and success.

Ready to Take Control of Your Finances?

As you can see from the information above, factoring for business can be a powerful solution for your cash flow needs. It can foster business growth and stability, and can even help ensure that you have professional assistance with invoicing and receivables management. However, this is not an area in which you can go it alone.

There are many, many factoring companies out there, and they’re all different. You’ll find factors that specialise in specific industries, as well as those who serve clients in all industries. You’ll find some that charge exorbitant fees, while others might have hidden fees and charges that will bite you in the end. Navigating this area can be daunting, especially if you’ve never worked with a factoring company in the past.

We can provide you with the assistance and guidance needed to find the ideal factoring company. We invite you to experience a free factoring consultation with one of our factoring specialists and learn more about the process, how your company can benefit, and which factoring companies might be the right fit for your needs.