Often with a small to medium sized business it is very difficult to step out of your comfort zone and try something new when it comes to interim types of cash flow solutions. In some situations, it may seem like these solutions to temporary cash flow issues are only for large companies, or they may be too difficult to obtain for a small business, particularly if you are considering a business loan.
One of the very traditional options in many industries is to use a factoring service. This is really what a small business needs as it allows you to get cash for invoices you have already issued and completed the work or provided the product. As such, this is not a loan, and there is no repayment. Instead, when you are factoring invoices, you are able to collect the invoice amount, less a small fee, and have that cash on hand to spend as you need to take on new work, hire new employees, make payroll or keep the company operating.
Sometimes business owners have a mistaken perception about factoring invoices. To help clarify, let’s take a look at each step in the process and give information that helps to clarify just how this works.
1. Apply with the factor, a third party company, who will provide the funding.
2. Get approval within 24 hours.
3. Within a few days the funds, which will be up to 80% of the face value of the invoices, will be in your account.
4. When your customer’s pay the factor they will deduct their fees and wire the residual amount of the hold of 20% into your account.
Choosing a Factor
Of course, there may be other options for your business to consider besides factoring invoices. You could apply for a business loan or a line of credit, but this can take weeks, and many businesses will not qualify. Keep in mind these traditional funding options will not consider accounts receivables for B2B companies, which may not give your company a creditworthy look on paper.
If you do decide to use a factor, look for a company that:
1. Has experience and a positive reputation in the industry
2. Provides clear information on all fees and rates
3. Provides information on penalties (the top companies will not have these in their agreements)
4. Avoid contracts that require a specific volume of accounts receivables to avoid penalties or additional fees
5. Verify the amount you can expect as your initial transfer from the factor
6. Check to see if you need to sell all accounts receivables or if you get to select
Finding the right factoring company gives you the freedom to use them when you need to and wait for your customers to pay when you don’t. This gives you ultimate control and decision making, which is always good for your business.