Factoring as a Stepping Stone to Becoming ‘Bankable’

September 16, 2022 | Blog

 

Picture an outstanding high school athlete who is devoted to their sport. They have aspirations of making it to the pros, but there are lots of barriers between dreams and reality: their academics being the biggest factor.

Instead of taking summer courses and attempting to get their grades up to make them admissible to four-year universities, they enroll at a junior college. That gives them the opportunity to meet the academic standards of those institutions with prestige athletic programs and continue to shine in their sport. Soon enough, there’s a scholarship offer from a Big Ten school that wouldn’t have been there otherwise.

Sometimes, all it takes is a stepping stone.

It’s no different for a small business that’s starting out. One of the biggest concerns for most fledgling companies is becoming bankable – a.k.a., showing financial institutions that you’re reliable enough to invest in.

But what if a bank loan isn’t always the right answer? Especially at the beginning, it may not be.

The No. 1 factor a bank looks for when considering a loan is stability, and for a rapidly growing business steadiness is rarely the name of the game. For any start-up, there are periods of unpredictability as you move toward steady growth and the continuity that any bank relishes.

That’s why accounts receivables financing, or factoring, may be the best move in the short term – and perhaps the long term as well.

For a company that’s just starting out, there are lots of details that need attention in those early days so that your business model can thrive down the road. Factoring can help take care of the nitty-gritty aspects of running a business that any bank will consider should you apply for a loan in the future.

Why else does factoring make sense for a small business that’s just starting out?

• Customer transparency. Factors like Sky Business Credit take a look at your customers’ history of payment before you enter into a contract. That vetting process allows you to decline doing business with companies that don’t pay their bills.
• Quick payments. A factor’s ability to manage the receivables of the companies you’re working with and stay on top of them pays off in the long run. Because of this, you’ll get timely payments and establish a trend of good paying receivables. If you eventually do apply for a bank loan, you’ll have a positive trend of customers that pay quickly thanks to having a factor in place.
• Positive customer service. Clients often say that Sky Business Credit gets their customers to pay quickly because Sky is doing the legwork. With a factor that follows up and pays attention (which isn’t always a given), you get paid faster and put the pieces in place to look bankable if you’re eventually looking for a loan.

When it comes to running your business and ensuring that you’re getting paid quickly to stay afloat, become profitable, and build your reputation, the details matter. And Sky Business Credit can make sure that no stone is left unturned by putting the disciplines in place to make sure your cash is always flowing. These include:

• Reviewing contracts. We’ll double-check the fine print of the contracts your customers have signed, going over all the details you need to be protected and ensure you get paid.
• Checking legal details. By looking at your invoices to make sure all the specifics are in place – things such as the correct address, purchase order, and invoice terms – you’ll be set up from a legal perspective.
• Requiring delivery sign-off. We’ll ensure that each contract includes a sign-off for delivery clause. You need this to get paid, and we’ll make sure it’s there so your funds aren’t slow to arrive.

Factoring is a great solution while you’re in growth mode, and for some companies, it’s a solution that stays effective even once you’ve become bankable. Some of our bigger clients use it purely for cash-flow purposes because their suppliers use 30-day terms and their industry pays in 50-60 days; their margins allow them to keep using factoring.

Once the business has two years of profitability and a level of equity in a company that balances out the line of credit it may be offered, it potentially becomes more “bankable.”

Growing your business over the long term is the goal, but you can’t get to the top of the mountain without working toward the peak. Factoring provides cash flow so that you can work on building a better financial profile down the road.

Depending on your needs, factoring might work for the life of your business. But even if it’s not, it can put you in position to become attractive to banks.

Then, when you’re ready to make even bigger moves, they’re ready for you.