What is Small Business Factoring?
To help with cash flow and liquidity, a company could either ask a bank for a loan or it could turn to small business factoring. Working with a factoring company may be the best option for small companies that are looking for the best possible terms and the most money to help fulfill upcoming orders. Let’s take a look at how factoring works.
A Company Has Accounts Receivable That Are Likely to Pay
First, a company will strike a deal to provide goods or services to either an individual or another business. Typically, businesses are allowed to pay either at a later date or over a series of installments. This creates an account receivable with an anticipated payment date or a series of payment dates. A factoring company will use these accounts as collateral for the advance it will provide.
Get Your Money Quickly
Factoring financing requests may be approved and funded in as little as 24 hours, but they are often funded within three to five days of initial approval. This allows your company to start working on fulfilling an order and making sure that you meet your deadline. In some cases, the entire amount of the loan may be disbursed at once. However, some may be held back in reserve and released as your clients start to make payments.
Almost Any Company Can Take Advantage
Unlike bank lending, small business factoring is generally available to all businesses regardless of their size or the amount of time that they have been in business. Instead, a lender will take into consideration the size of your accounts receivable as well as the creditworthiness of your customers.
Don’t Take on Debt or Pay Interest on a Loan
Technically, factor financing is not a loan and doesn’t come with interest. Instead, the money your clients owe you will go to the factoring company while you typically pay a fee for using the service. Overall, the costs related with factoring are much lower than what you would pay to get a bank loan assuming that you are eligible for one. Another advantage is that you aren’t on the hook for a long-term liability when you decide to take advantage of factoring options.
You May Choose Which Accounts You Want to Liquidate
In most cases, you get to choose which accounts that you want to liquidate, which means that you can choose to factor those that may yield the most amount of money now. This gives you the flexibility that you need to maintain a reliable cash flow while ensuring that your customers get payment terms that meet their needs.
Small business factoring is an effective way to get cash without having to ask for a loan. Almost all companies qualify, and you may be able to get the money in a single day, which means that you don’t have to temporarily shutdown or delay orders because of a lack of cash.Posted on: October 25, 2016, by : Mark Amstertini