It’s taken months, if not years, for you to get to this point. From choosing your business’ structure, name, and location to tackling all the legal angles, hiring your team, and establishing a customer base, the dream of owning and running a company involves a painstaking level of preparation.
And that’s not even considering the most important angle to any business, big or small: finances.
If your growing business serves a lot of customers, cash can get tight in a hurry. While waiting for your clients to pay their invoices, you have other expenses to worry about — not the least of which is paying and retaining your own employees.
Some companies might look into a loan from a bank or other large financial institution and discover that the bank has a very specific box they must fit into to be approved, but factoring provides an option that’s often more suitable to businesses that are growing but don’t fit the bank’s box for approval.
Also known as accounts receivable financing, factoring allows a business to get paid based on the future income due on an invoice. For a business whose cash flow is low because of short-term debts or bills that exceed their sales revenue, it can be a life-saver. Factoring is a way for a business to sell their receivables to a financial provider that isn’t a bank and receive cash to keep their company running.
So why is factoring a better option than a loan for a business that relies on consistent cash flow? Here are four key reasons:
A regular bank loan typically has a strict timeline on when the money your company borrowed is due back regardless of your cash flow, and they have a hard cap on the maximum amount you can borrow based on your company’s financials. A bank loan is a liability on your balance sheet. Factoring companies pay you up front for your invoices and are repaid when your customer pays the invoices. That gives you expedited cash flow upon fulfilling sales. There’s also no limit to the amount of credit available to you as it is based on the amount of sales you generate and the credit worthiness of your customers. Factoring can also be an off-balance-sheet sale of the receivables as the factor purchases them and advances funds..
Think of it this way: With a business loan, the weight of the debt lies on you. With factoring, the weight of debt is taken off your shoulders and you still receive the capital to grow your business.
For a smaller business or contractor, getting approved for a bank loan often has a lot of hurdles. If your credit isn’t great, or if your business is yet to be established in the market, the answer will often be a no. With accounts receivables financing, qualification depends on the credit-worthiness of your customers instead of your business.
The approval process for a bank loan isn’t just complicated — it can often take multiple months before you hear a yes or a no. With factoring, you can get funds in your account in as little as 24-48 hours after your invoices are verified. That allows you to pay your bills, meet payroll demands, and continue to help your business thrive instead of waiting around for funds to appear.
Even if you get a bank loan, you’re still going to have to chase down your unpaid invoices. If you don’t have a collections department, that can take up a significant chunk of your time. By using a factor, they’ll handle collection duties and communication so you can devote your resources to matters that can help you make more money.
Bank loans are a great tool for some businesses. They help your business build credit and can have lower interest rates. But for a business that’s reliant on funds consistently coming in, experiencing a growth stage, or isn’t qualified for forms of finance reliant on a history of good business credit, factoring is a debt-free way to ensure continued cash flow — and that can be the difference between surviving and thriving.