The article pointed out that factoring can be helpful for businesses in the following five situations. When is factoring right for your business? A recent Kansas City Star article pointed out several advantages to accounts receivable factoring (sorry, link no longer available). You probably use some combination of credit cards, traditional loans, equipment leasing, working line of credit, factoring and/or whatever other financing forms give your business the necessary cash flow to operate and the most leverage to expand. In fact, many if not most small businesses “layer” different types of financing. Look, there are so many different forms of financing available to small businesses today, that no single type of financing is right for every business. Wikipedia has a good discussion of the key differences between a bank loan and factoring receivables: But is Factoring Right for Every Business? The answer is a big “NO.” Factoring could still be a viable option in that situation because your credit situation is not the main issue to the factor. Let’s say hypothetically that you are not able to qualify for a bank loan. It’s really your customer’s likelihood of paying that matters most to the factor. Rather, what the factoring company looks at is the party that owes you the receivable. Difference between factoring and a loan With a bank loan or credit cards, the bank or financial institution will make a decision based on your creditworthiness and your debt ratio (meaning your company’s and in many cases of small businesses, yours personally).īut in factoring, yours and your company’s creditworthiness are not the main issue. It can even allow you to offload some of the headaches of collecting your receivables. Many factoring companies will handle collections. Factors sometimes pay the initial sum within 48 hours.įor the right kind of business, factoring can be an excellent way to increase cash flow – the lifeline of any small business. There’s usually less paperwork than in a bank loan. Factoring fees may range from 2% to 15% of the invoice amount. When it is collected, they pay you the rest, less a factoring fee. The factor takes responsibility for collecting the invoice. The factor advances a large chunk of the invoice amount, say 80%, immediately. What Factoring Is In its simplest form, factoring is when you sell your invoices (or accounts receivables) to a financing company called a factor. But in my experience it’s also little known, and even flat-out misunderstood. Factoring receivables is one of the forms of financing that sometimes gets the Rodney Dangerfield treatment – you know, "don't get no respect."įactoring accounts receivables, also known as invoice factoring, is an established way of providing working funds for a business.
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