What is Factoring?
In elementary school math, you learned all about factors, but you may not have been taught about the practice of factoring. If you own a small business, factoring is definitely a word you should know.
The world of a small business owner is a challenging one. You often wear numerous hats and have to juggle many balls at the same time just to stay afloat. Nevertheless, when you want to move beyond simply surviving and make your small business a success, it is important to have an abundance of tools at your disposal that you can use to get you out of a jam. One of those tools is factoring.
A Definition of Factoring for Small Business
Since the beginning of history, man has developed ways to buy, sell and trade for the goods and services he needs. Factoring is yet another method. It used to be an instrument only for big business but now smaller companies have realized that they too can benefit from this procedure.
There are many types of businesses that perform quite well on paper but have very little cash on hand. This is common for those small businesses that operate with a lengthy account receivable cycle.
For example, you order supplies and have bills to pay each month, but your
customers are allowed to take up to 90 days to pay you the money they owe. As a result, you have lots of money that will be coming in soon but due to general operating costs for your small business, you have funds being paid out immediately. This is what is known as an account receivable gap.
In the process of factoring, you sell your account receivables to an alternative
lender, called a factor. The factor then pays you up to 80 percent of the value of the account receivable and collects the funds owed by your customer. You get the instant cash you need without having to wait 90 days, so you can pay your bills, make payroll, manage taxes, or handle whatever urgent business matter you must attend to.
Different Types of Factoring
Factoring can be an ideal solution for small business owners who need access to cash on a constant long term basis but don’t have the collateral or stellar credit necessary for a traditional bank loan. Traditional Factoring is expensive because you are locked into them for years plus it will take at least 30 days to get the Factoring process approved. There are different types of factoring companies so you should gather all the information first to decide which option is best for your small business if you feel you need financing for more than 2 years.
Traditional factoring companies could be a good place to start when you have
a business with lots of account receivables that is growing over 25% for more
than 2 years but no access to fast cash. There are several reasons why a booming small business would need this, such as taking advantage of an upcoming business opportunity or to hire new staff due to rapid growth.
However, traditional factoring companies typically require a long-term contract, often up to two years, and sometimes very high fees for their services. Also, some have awkward policies that lead to informing your customers that you are using a factor, which can seem like a red flag signaling that your business is in trouble.
You may also want to consider cash advance factoring companies, like
Financing Solutions (www.fundmypayroll.com). These firms offer a quick
repayment schedule, usually 26 weeks or less, instead of years. In addition, they have a simpler approval process, providing you with less worry and cash in your account in a matter of days and most business don’t really need a long term Factoring/financing solution but do need someone they can turn to when they can’t make payroll for a limited time period.
The Best Time to Use Factoring Companies
Studies have shown that small businesses are turning to factoring more now than ever, due to a tightening economy and stricter laws regarding traditional bank loans. Without a doubt, the need for businesses to have access to cash on hand is universal.
Factoring is a solution best used by small businesses that are growing but have not yet achieved the high status required for more traditional funding. If this sounds like your small business, you may want to add the factoring tool to your arsenal.