small business factoring

Small business factoring is a simple process and it is often regarded as a better choice when compared to business loans or other secured loans such as asset based business loans. This is because invoice factoring is not a loan at all – it is a process where the small business sells their invoices or accounts receivables to another company (the factor) for a discounted price.

Say for example Company A is the small business and Company B is the factor. Company A just signed a deal with a new customer and they are promised to get paid $1000 after 30 days. Company A doesn’t want to wait 30 days so they sell the invoice to Company B and get $980 total. Company B later collects the actual $1000 from Company A’s customer, therefore earning $20 in the process.

Pros:

1.    Factors will give the money immediately upon approval. This usually amounts to just one to two days so the small business won’t have to wait long. This is very quick when compared to regular business loans that can take two to three weeks for approval.
2.    Small business factoring is not a type of loan therefore the business does not incur any form of debt that has to be repaid. The assets are sold at a discount price therefore there is nothing left liable on the business to take care of.
3.    By adding immediate resources as capital, a small business can see tremendous growth as other resources on a daily basis continue to flood in. There is no waiting window therefore the business will consistently see money flowing in.
4.    It is not a loan – the factor will only assess the customer’s capability of paying/fulfilling the invoice and will not take into consideration the credit history of the small business. Small businesses that often do not have the credit standing to qualify for a loan can easily get approved for small business factoring.

Cons:

1.    When compared to other sources, factoring can become a highly expensive means of attaining capital. The invoice is sold for a discount (average is 80% of the total) but there is also a small processing fee for risk assessment.
2.    In case the customer does not fulfill the invoice, it can become a tiresome mess for both the business and the factor to chase them down and get the payment. Recourse financing is where the business will be responsible for collecting whereas non-recourse is a sort of insurance, stating that the business no longer has responsibility over the issue and that the factor will shoulder all the responsibilities of collecting the payment.
3.    In most cases, the factor will alert the customer that their client, the small business, has surrendered collecting authorities to the factor. This might not look good for a business’ image in regards to their customer because it might signal instability.

Like all financial methods, small business factoring is not perfect. Big businesses still go back to it and small businesses will discover that it is perhaps the best means to establish steady cash flow, especially if the business is still new and starting.