A lot has changed in the business landscape in the last 10 years, and analysists have reported that invoice factoring and cash advance sectors are increasing in popularity and momentum, growing at a double-digit rate each year. The market for factoring, wherein businesses take out a cash advance against their invoices, is even greater with Morgan Stanley stating the industry makes as much as $15B per year.
Why Factoring for Small Business is a Practical Option
With such a significant rise in popularity, one would have to wonder what makes cash advance services very attractive to small business owners. The reason for this phenomenon is not actually hard to comprehend. First of all, factoring is so much easier to obtain compared to bank loans. Banks usually check the length of history of the business, the amount of collateral needed and the payment terms of the loan, and many small businesses have not been around long enough to meet their criteria.
In addition, most traditional sources can only help borrowers who want to apply for long term loans (ie. 5 to 10 years). If you need credit and want to pay it off within 3 months to 3 years, banks usually won’t be able to help you.
How Factoring Works
There are many factoring companies online right now and they follow the same basic principle. If a business is having difficulty meeting cash flow, they can turn to a factoring service to get a cash advance so that they can continue their daily operations and even fund their expansion.
Factoring companies are very useful when it comes to short term cash advances and they provide “loans” of as much as 90% of the amount in the invoice. These alternative lenders, in turn, charge a “fee” for the service, usually a percentage of the invoice in addition to collection and management fees, if applicable.
When to Turn to Factoring
One important thing about factoring that a business needs to understand is that it’s not cheap at all but it’s also no more expensive than taking out a credit card cash advance. In fact, it’s probably cheaper and it also gives you the added benefit of not having to collect payments from your clients. Some factors even save you the hassle of doing credit checks on your clients because they can do it for you as part of their service.
But to ensure that you choose a trustworthy and honest factoring service, you have to take some precautionary measures.
- Choose a factoring service that really understands your business. Do business with one that has a high level of understanding of how your business works and the processes you employ so you can stand to benefit most from the partnership.
- Pick a funding partner with a consistent and guaranteed source of capital.
- Examine the terms of the transaction. Check the interest rate and fees and compare the numbers with what other funding providers are offering.
- Get a copy of the contract and read it in advance (before signing on the dotted line).
- Scrutinize the management team, find out how long the company has been around, and ask for customer references.
Factoring as a financing option for a startup business has proven to be very useful not only to keep the company afloat but also to help them grow. With a steady cash flow, there’s nothing that will stop you from increasing your revenue and taking advantage of every opportunity you can get to make more money.