As a new or growing business owner, you may run into immediate and dire situations where you either need a line of credit or cannot get one due to lender preferences, qualifications, or regulations. These are not unique problems. They are quite common for many companies – especially those within the small to mid-sized range – who need the financing the most to compel growth.
Fortunately for those companies, factoring (often referred to as invoice financing) provides an even better solution and outcome for your business than do traditional lines of credit.
What is Factoring?
Your business will finance an invoice through a factoring financing company who will provide you with an almost immediate (usually 24 to 48 hours, dependent upon your agreement and previous relationship) funding that can be instantaneously inserted into the cash flow structure of your business. The transaction is resolved when your client pays the factoring finance company in full. You can then factor as many or as few invoiced as you would like, thus coinciding with your needs and not with a bank’s regulations.
Why Would You Need It?
- Clients who are corporate rather than individual or personal may take as long as 30 to 60 days to pay the last installment of an invoice. Dreaded is the client who makes you wait 90-120 days. These elongated time periods, while traditional, can often paralyze your ability to make your cash flow work for you instead of often being life support against potential bankruptcy.
- Whether the financial crisis has caused banks to become more stringent in their lending practices and standards or your ever-growing business has a challenging hurdle meeting with collateral requirements, the approval process for getting a standard line of credit can prove difficult.
- Banks too often prefer more sizeable clients that will need ballooning financing and increasing debt as a means of operation. Your smaller scale operation is one that runs on deadlines and within budgets.
- Even if you were approved for a line of credit, the problems do not cease. Lines of credit too often have maximums that may be determined by your business’s on-hand collateral at the time of the underwriting. What if you see a sudden spike in sales which affects your immediate needs? What if the bank doesn’t want to increase your line until you have proven yourself to be a worthy payer? It may take years that you don’t have. Growth often demands immediacy and stems from almost instant changes in environment (such as a major competitor closing its doors).
Why Should Your Business Use Factoring Rather than a Line of Credit?
- The qualification process is much easier. The invoices you allow for factoring are used as the collateral for the transaction. The creditworthiness is based upon your clients and not on you or your business.
- Factoring is a process most commonly used by startups and companies who have not spent years building up a line of credit or a track record with a bank. Many business websites have said that factoring is, in fact, something a startup needs to consider as a stepping stone to success.
- Factoring is often used by companies that at one time or another have fallen upon financial stress either internally or as a result of a difficult climate for business. It can be a “turnaround” for your business when you still need more immediate access to cash flow.
- Factoring is a flexible form of financing. It grows and contracts as you decide alongside your business and not against it. The maximum line is dependent upon the value of your invoices. As sales increase, your financial support increases also.
Factoring can be a worthy and brilliant replacement for a line of credit if you cannot wait for long payers, need the cash flow within 30-60 days, and you sell to creditworthy clients. It is a form of financing by which you get to make the decisions again, as you had always dreamed when your business was a mere thought or idea. It puts the power back into the hands of the business owner rather than the banker. Make a good decision today and consider factoring as a direct road to growth.