Factoring Ranks as the Easiest Way to Get Cash for Business
Business has become increasingly complex because of COVID-19 closures, slow payments for accounts receivable, and reduced traffic for brick-and-mortar stores. That’s why it’s important to learn why factoring is better than a bank line of credit.
How Factoring Works
Every business owner ends up with cash flow problems for various reasons such as business downturns, difficulties in collecting accounts receivable, illness of key staff members, and more. Some owners turn to bank loans or lines of credit. However, you can get a better deal by selling your accounts receivable invoices to get the cash you need.
This type of financial transaction is called factoring, and many businesses use it regularly. You simply sell your accounts receivable, and you can avoid bank loans and the complex application process. You stay free of debt, maintain your good credit, and avoid lots of bureaucratic red tape. The following steps describe how the factoring process works:
• Set up a factoring account with our company, Small Business Funding.
• Invoices that you issue on customer accounts for 30 to 90 days qualify as potential invoices to sell.
• Determine which accounts receivable you want to sell.
• We’ll do some credit checking on your debtors to determine if they’re creditworthy.
• We’ll offer to buy the acceptable invoices with a high down payment of the total of acceptable invoices.
• Typically, we deduct about 10% to 20% from the cash advance to provide extra funds to cover nonpayment of some invoices.
• These funds are deposited into reserve accounts until the final calculations are made.
You’ll receive any additional funds after the reconciliation process. After all the invoices are collected, the factoring fee is deducted from the reserve account.
You can extend your financial prospects by selling the invoices of customers that have a history of paying their invoices slowly. You can keep any invoices of companies that pay their invoices quickly, too. Our advance payment rates vary by industry. Riskier industries like construction and medical products might receive a down payment rate between 60% and 80% of invoice totals. Companies in reliable industries might receive between 80% and 90% of their invoice totals.
The Difference Between Invoice Factoring and Invoice Financing
The terms invoice factoring and invoice financing are often used interchangeably, but they’re different financing approaches. In factoring, you’re selling your invoices, whereas in financing, you’re using your invoices as loan collateral.
Recourse and Non-Recourse Factoring
You might be offered recourse or non-recourse factoring for your invoices. Recourse factoring requires you to buy back any invoices that can’t be collected in a timely manner, which makes you responsible for invoice payment. In non-recourse factoring, the factoring company takes on some or all of the risks of nonpayment.
However, non-recourse factoring doesn’t protect your company from all the risks of nonpayment. Some companies won’t cover bankruptcies, so ownership of those invoices will revert to you. There may be other situations in your contract that make exceptions for non-recourse factoring as well.
For example, many factoring companies offer non-recourse factoring that doesn’t include accounts where the debtor declares bankruptcy. You must buy back any bankrupted debts. Non-recourse arrangements usually have a higher factoring rate, which is often as much as a full percentage point, so it’s important to check the details of any factoring offer.
Most factoring companies pursue collections professionally but aggressively—regardless of whether the sale of invoices is recourse or non-recourse factoring. We’ll do everything possible in a legal sense to collect all the money from your invoices to ensure a healthy reserve for you at settlement time. Technically, factoring companies own the invoices and can use various techniques to increase collections.
Collections Efforts of Factoring Companies
Factoring companies can start their collection efforts after the invoice goes into arrears for non-payment after 30, 60, or 90 days. Professional factoring companies won’t usually begin collections calls until 10 days after the payment deadline, but some factoring companies can be too aggressive.
It’s important to keep in mind that your customers will view any collection efforts as your company’s responsibility. You could lose good customers if your factoring company makes a bad impression during collection efforts. You might want to troubleshoot difficult collections by calling the clients to make the process run more smoothly.
Factoring Versus Bank Loans
The benefits of factoring include our professional management of your account. Companies of all sizes can sell as few or as many of their invoices as they choose. Factoring is one of the alternative ways to raise cash that stabilizes cash flow. Bank loans have always been an option, but these are relatively hard to get. Loan officers check your credit score, payment history, collateral, and business plan to determine whether you’re a good repayment risk.
Bank loans are uncertain, often come with high interest rates, and take a long lead time, so they’re often poor options for capitalizing on time-sensitive business opportunities. Loans increase your debt-to-income ratio and reduce your ability to get a loan in a financial emergency. An established factoring account can provide quick funds in just a few days.
A business line of credit is a better financing option than a traditional loan. The biggest problem is that you must qualify and set up the line of credit in advance. Once approved, you can withdraw funds as needed against the credit limit. You only have to pay interest on the funds that you use.
Unfortunately, most small business owners can’t meet the rigorous qualification criteria or business collateral needed for approval. The credit limit can be inflexible and unsuitable for financing spur-of-the-moment business opportunities. Factoring is an ideal alternative for all businesses regardless of creditworthiness or the availability of collateral.
Factoring can reduce collection expenses, improve collection rates with professional management, and relieve the stress of red tape and paperwork. Your factoring company will handle the details and check out your accounts receivable invoices with discretion.
You might not qualify for a bank loan, but factoring doesn’t depend on your credit score. Rather, it deals with the creditworthiness of your customers. You can get ready cash without going into debt, selling off assets, or using your personal and/or business property as loan collateral.
Banks offer few alternatives to their rigid loan-approval criteria. Most companies that use factoring are very satisfied with the results. You can get funding when you need it without adding more debt to your balance sheet or going through the extended business loan approval process.
The Benefits of Factoring
The benefits of factoring over other ways to raise capital include:
• No debt
• Quick cash available after the five- to 10-day initial setup
• Flexibility to sell only the invoices you need
• Factoring fees that can be as low as 1.5%
• Advances that can be as high as 95% of invoice totals
• Greater control over your finances
• Ability to offer customers expanded credit limits
• Relief of the stress of waiting for payment in times of reduced cash flow
• Strong company financial profile not needed
Reasons for Selling Your Accounts Receivable Invoices
There are many reasons why cash flow might become a problem in today’s business operations. Most companies experience seasonal slowdowns when cash flow can become a problem. The markets can go into temporary recession, and natural disasters always hurt business.
It’s not always about reduced business. Many business owners use factoring to take advantage of new opportunities. Manufacturers who have healthy cash flow can increase production, add new product lines, and finance marketing efforts. Construction companies need materials, equipment, and manpower to handle more lucrative projects.
Home-based businesses often have a tough time getting loans from traditional sources like banks. Factoring can provide cash and relieve the need to pursue collections, which often cuts into the time needed to generate new business. Expanded cash flow options give you the opportunity for real, sustainable business growth. You can receive funds for your finished work as soon as you can provide a copy of the invoice.
Bank loans or a line of credit only receive approval after a loan officer reviews your operating history, credit score, and other factors. Gathering the proofs and information alone can take days or weeks. Some bank loan decisions take months, but factoring approval can take as little as one business day.
Summary of Your Financing Options
We try to present a balanced overview of financing options for business owners. We understand and empathize with your needs, and factoring can be a great method of alternative financing that any company can utilize. You can get immediate cash to cover shortfalls, business downturns, seasonal slowdowns, and business expansion opportunities.
Factoring is just one possibility among the many financing strategies that we offer our clients. We offer factoring, direct business loans, and alternative loans to meet your needs. We enjoy an A+ rating from the Better Business Bureau, and our company provides a dedicated funding manager to handle each of our client’s financial needs. If you want further information about why factoring is better than a bank line of credit or information about other financing options, apply now.