Probably the most notable reason why accounts receivable factoring has become so popular in the US and overseas is that it offers quick funding at a time when banks are reluctant to lend to small businesses. When you apply for a bank loan, it will take you a long time to find one that’s willing to do so and the application process can drag for weeks.
But with accounts receivable factoring, factoring companies are more likely to give you financing and they do so pretty quickly. What’s more, once the factoring line is set up you can get the money you need in a day or two.
But this isn’t the only help you get from factoring companies. By getting your funding by factoring your accounts receivable, you help your business in other ways. Take a look:
Invoice Tracking and Payment Collection
In accounts receivable factoring, the factor takes care of the invoice processing and the payment collection. They give you the advance on the accounts receivable, and your customers’ payments come to them. Then they send you the rest of the money minus the fees the factor charges.
The factor also investigates the credit standing of your customers. That’s standard, because that’s where the money will come from that will cover the factor’s cash advance and fees.
So now you get an additional layer of protection against supplying a company that’s unlikely to pay up in 30 or 60 days. The factor investigates your customers and only gives it approval for the “safe” customers.
With the money in hand, you can now pay your bills. You can meet payroll, hire more people, buy more equipment, pay back any of your outstanding debts, cover the rent, and engage in more serious advertising.
You can also pay for supplies more quickly, and that means you can enjoy discounts offered by suppliers. You effectively minimize your expenses.
More Financing Opportunities
One thing you also have to remember about factoring is that it is not a loan. It’s technically an adance of your accounts receivable. And that means there’s no additional debt reflected in your balance sheet, which makes it more attractive.
And because you don’t carry additional debt and you’re able to use the cash advance to pay any outstanding debts on time, you can improve your credit score.
What that means is that if later on you want to apply for a traditional bank loan or entice venture capitalists to invest in your business, you’re in a better position to succeed. Your improved balance sheet and credit score means you’re a better opportunity for banks and investors.
With accounts receivable factoring, the fact that you can get funding quickly in a business environment where so many small businesses can’t get financing is already an advantage you can’t ignore. Add the extra benefits, and it means you should really consider accounts receivable factoring as a more suitable option than a traditional loan.