Finance for a Business: Line of Credit vs. Factoring

Quite a few people think that when someone needs finance for a business, he should get a bank loan. The business owner gets a lump sum of money, and then after a specified period of time they repay the amount with interest. But today, there are already quite a few options for business to business finance.

A business, for example, may have a line of credit available for them. Or perhaps they can also enter a factoring deal with asset based lending companies. So which one is better for a small business?

What is a Line of Credit?

When a business has a line of credit, then the owner may take out an amount of money depending on how much they need at any given moment. The line of credit has a maximum amount, and they can’t borrow money more than the limit. When they repay the money they borrow, they then increase their credit line.

Using a credit card is very much like a using a line of credit. If you have a maximum limit of $10,000 on a credit card, then you can only borrow up to that amount before you start paying off what you owe. Meanwhile, you also have to pay interest.

What is Factoring?

Factoring is a type of financing without technically getting a loan. Instead, you give your accounts receivable to a factoring company, and in return you get an advance on the value of the money instead of waiting for it. So if an invoice is worth $10,000 and the factor agrees to advance 80%, you get your $8,000 right away instead of waiting for 30 or 60 days. When your customer pays up in full at last, the remainder of the money is passed on to you, once the factor has taken off its fees.

Which Is Better?

If you can get a line of credit, it may seem like this is the better option. But the operative word here is “if”. Getting a line of credit from a lender or a bank is not as easy compared to dealing with a factoring company.

First of all, the factoring company doesn’t really care about your credit rating. They mostly care only about the credit rating of your customers. If your customers have stellar credit, then factoring approval is almost automatic.

Using a credit card or a line of credit may also pose risks for your company, because you can’t really be sure that you’ll be able to pay back the loan with the interest on time. That’s not really so much of a risk with factoring, because you’ve already made the sale with your customer. You already have the money to pay the advance, except that you need to wait until the due date of the invoice.

When it comes to finance for a business, you may find that factoring offers the least amount of risk for your business. When you have excellent customers, you have little risk of getting your application for financing rejected, and you have little risk that your factor won’t get back the money they advanced to you.

How Medical Receivables Factoring Can Help Your Clinic Stay in Business

These days, it’s not entirely surprising to see clinics closing down. They stop doing business because patients aren’t coming in due to high costs of health care, or there’s too much competition in an area and you have to set your clinic apart from the rest. In all likelihood, you’ll need a quick infusion of cash to help your clinic operate and thrive. And this is where medical receivables factoring comes into the picture.

Medical factoring companies can help you because they can advance you the money owed to you by insurance companies. If you have enough capital, you can do the following to help your medical clinic rise above the competition.

  • Boost your advertising. With the money you get from the factor, you can advertise your clinic more effectively. Perhaps you can start a website, and if you already have one you may want to set aside a budget to improve it. You can make it more attractive, feature more articles, and perhaps also improve SEO so that your clinic’s website is ranked at the top of the search results when patients in your area are looking for clinics online. All these require the help of professionals, and they cost money.
  • Upgrade your equipment. You can also feature more advanced technological equipment in your clinic. Not only do these new tools help you treat your patients more effectively, but your clinic also becomes more attractive to patients.

You can get better diagnostic tools so that you can find out what’s wrong with your patients. You can give them more comprehensive and more accurate tests to help with the diagnosis.

You can also get new tools to help you get more patients. You may offer different solutions for certain ailments so that your patients will have several options.

If you think that your current equipment is still ok, then you can still use your funds to make sure that they are properly maintained. By helping your equipment last longer, you can get full value for them for as long as possible.

  • More personnel. It’s not easy to run a clinic all by yourself. That’s especially true when your advertising succeeds and you have an influx of new patients. You may run yourself ragged trying to take care of them all.

But with enough capital, it may be possible for you to hire new nurses and doctors. You may even hire doctors with a different specialty so that you can expand the range of your health services.

This is especially true for dental clinics. If you’ve been specializing in preventive dentistry, for example, then by getting new dentists on board you may be able to offer new dental services such as braces, aligners, and crowns.

With medical receivables factoring, your medical clinic can thrive when others have failed to survive.

Considerations Before Signing a Contract with Factoring Companies

When you deal with factoring companies so you can get the funding you need, you’ll need to sign a contract. But before you sign on the dotted line, you should make sure you understand all the business finance terms. That way, you can anticipate what’s going to happen. You’ll know how much capitalization you’ll receive, and how much you have to pay.

The problem is that sometimes you may not be fully aware of what the business finance terms in the contract mean. Before you enter into an agreement with factoring companies, make sure you take note of the following considerations:

  • Advance rate. This is the money you get in advance, represented by a percentage of the value of the account receivable. Most of the time, The advance rate hovers around the 80% mark. Some of the more inherent industries may only have a 70% advance rate average. However, some specialist factoring companies in certain niches may promise an advance of up to 95%, although this rate depends on the credit history of your customers.
  • Discount rate. This is the fee represented by a percentage of the value of the account receivable. The discount rate similar to the interest charged by a bank when they give you a loan. When your customer finally pays up, the factor takes the percentage from the payment before they pass on the payment to you.

Usually, this rate ranges from 1 to 6 percent, but you also have to pay some attention to the period of time it covers. For example, a 1% discount rate may only apply for 10 days, so an invoice which sets 30 days for payment may actually have a 3% discount rate, and payment within 60 days would then cost you 6%.

  • Reserve amount. Usually, the factor holds back an amount of money from the payments to cover any instance of non-payment. The amount of money for the reserve differs with each factor, and obviously you want this to be as low as possible, so that you get more working capital.
  • Length of time. This is the specified time during which you make use of the factoring process. You’re usually locked in for a specified period, and in that time frame you’re required to submit some accounts receivable for factoring.

The contract may also define which account receivable should be factored. You may be given a choice, or there may be a minimum number of invoices involved.

  • Fixed fees. Many factors charge additional fees aside from the discount rate. For example, there may be a fee to set up a factoring line, while each particular account receivable may have a fixed factoring fee as well. There may also be a fee when you end the factoring agreement early.
  • Late fees. There may come a time when a customer pays late. Every instance of this entails a penalty because the factor didn’t get back their money on time.

Take note of all these considerations and you can use them to compare which contract is better when you’re trying to choose among several factoring companies.

Busting the Myths About Accounts Receivable Factoring

Accounts receivable factoring is a way to get funding for a business, and for a growing number of companies it is in fact the only way to get working capital. Quite a few banks these days aren’t in a very generous mood to lend money to small businesses, and so getting money from factoring companies is the only way to go.

In factoring, you exchange your accounts receivable for cash now, instead of waiting for 30 or 6o days to get paid. The factor gives you about 80% of the value of the invoice (take note that the actual percentage varies) and then you receive the rest of the value of the invoice (minus the fees of the factor) once your client pays up in full.

This method of obtaining capital has its fans and critics, and some of these people are responsible for some of the myths concerning factoring. So let’s tackle these misconceptions once and for all.

  1. It’s too expensive. Aside from paying a percentage of the value of the invoice, you may have to pay several types of fees to the factor. Add all these costs together, and it may very well turn out to be a more expensive method of capitalization than getting a simple bank loan.

But at the same time, you have to face reality. If the inability to get more capital will cost your business a lot of money, then factoring actually makes much more sense financially. It’s easier to get the capital you need this way. With a bank loan, you stand a very good chance of wasting a lot of time applying to get a loan only to have your application rejected in the end. When it comes to your business, you really can’t take that chance.

  1. Factoring will keep your business from failing. Actually, factoring is a great way for your business to foster growth. The money you get depends on your sales, so the more sales you bring in, the more money you can get in advance.

When your business is failing and your stakes are declining, then factoring may not be much of a help for your business at all. Remember, you get an advance on the value of your invoices with factoring. If the value of your invoices are falling by the wayside, then your advance money from the factors are reduced as well.

  1. Factoring could damage your relationship with your customers. This myth stems from the SOP that your client pays your factor directly. Some people seem to think that factors are likely to harass your clients to pay up (the way credit card collections people do). But that’s not the case at all. While the factor may send courteous reminders, getting your clients to pay will still be your job. When your clients are late in paying, you may even end up paying a penalty because of it.

Hopefully, we have clarified some issues that are muddying the waters, and you now have a clearer understanding of what accounts receivable factoring is all about.

Bonus Benefits from AR Factoring Companies

AR factoring companies can advance you up to 80% of the value owed to you by your customers. You can use this money to take care of all your urgent financial needs, from covering the rent and utilities, buying supplies to fulfill purchase orders, and even to meet payroll.

But depending on your agreement with your factor, this crucial advance may not be the only benefit you get from them. In fact, the popularity of factoring stems from the fact that you also get “bonuses” aside from receiving your much needed working capital.

Here are some of the benefits you may receive:

  • You will know the creditworthiness of your customers. When you have your invoices factored, your factor doesn’t really care a whole lot about your own credit rating. This is why so many small businesses turn to factoring in the first place.

Instead, the factor investigates the creditworthiness of your customers, where the repayment of the cash advance will come from. And you know the results of those CIs. You’ll learn which of your customers have a bad habit of paying late or which among them may end up not paying at all. Even if your customer has been paying you in full and on time for a year, if your customer actually has a bad history paying other companies then it’s likely that they will not pay you too.

Your factor can even investigate your new customers. This enables you to refrain from offering them credit terms when you discover that they don’t have an excellent history of paying what they owe.

  • You get your accounts receivable in order. Your factor (especially the best factoring companies) can do this for you, so that everything is organized properly. Each of your customers will have their own file, with their invoices and payment history in your accounting system. Each file may contain all the correspondence. Invoices are tracked to see which ones are due, which ones are outstanding, and how much is owed to you.

Your factor can do these things as part of the service they offer. They have a vested interest in the state of your accounting, since after all they want assurances that they’re getting back the money they advanced to you.

  • Your factoring company can take care of the collection. Collecting payments can be the most difficult part of a business. It may be off-putting to send reminders about due dates, especially when the customer is late. Doing this politely and professionally needs a delicate balance of courtesy and firmness.

With the best factoring companies, this task is no longer your responsibility. The factor takes care of it, and they’re the ones who will send the reminders. The best factors have enough experience in this matter, and they know how to do it in a way that will ensure you get paid without offending your clients.

Just remember, AR factoring companies are not magicians so don’t expect them to make things better for you all at once. But they can help a lot, and if you use their help wisely you may find that things will finally be looking up for your business.

What Are the Risks for the Factoring Business?

In the factoring business, factoring companies advances you a portion of your invoices. You don’t have to wait 30-60 days to get your funds, and so you can use it for emergency expenditures which can help keep your business stay afloat. But for this service, the factor will charge you a certain fee, just like a bank would charge interest for a loan.

In all honesty, your factor takes some risks when they offer you the advance money. This is why it’s justified when they charge you higher fees than what banks charge for loans. It’s not only that offer a faster application and setup process. It’s also to compensate them for the risk they are taking, or for the actions they take to minimize these risks.

Here are a few of the risks of factoring companies:

  • The invoice may not be real. These things happen. A business may have some invoices factored and so they receive 80% of the value of the invoices in advance. But perhaps no sale was made to that company, and the invoices are fake.

It’s for that reason the factor has to take steps to verify the authenticity of the invoices. The factor may have to confirm with the customer that your business did sell the volume of goods at the price specified in the invoice. They’ll also confirm when the invoice is due.

  • Are your customers creditworthy? Even if the invoices are authentic, the paying habits of your customers must also be investigated. They should have a good record of paying their debts in full and on time.

When your customers have a habit of not paying in full or on time, they represent a risk not just for you but for the factors as well. The factor may charge a higher fee for advancing you the money, or they may even refuse to advance you the money altogether.

Of course, your best option here is to not offer credit to these customers in the first place. But if you do, you may have to wait when they pay in full, or if they pay at all.

  • Do you have very few customers? The stability of your company matters to the factor, and that means they want you to have a large customer base to rely on. If you only have one or two customers, then your company’s future is in jeopardy. Your business can fail if even a single customer goes under or if they stop doing business with you.

There are several other risks, such as your own company’s credit history. It’s for all these reasons that the factoring business charges its fees.

Factor Receivables and Other Ways to Grow Your Business

Growing a business can be very challenging. In today’s environment, business can be slow and customers often demand credit. Your customers may need 30 days or maybe even 60 days to pay up in full. But herein lies the problem: you need the money now. Fortunately for you, you can opt to factor receivables so you can get a large chunk of the payment in advance.

But you can’t simply rely on factoring companies to help you. Even the best factoring companies can only do so much. They can give you more time to focus on growing your business by taking care of your accounts receivable and your collection, but you still need to elevate your company above the rest of your competition.

So aside from factoring, here are some ways which may help your business thrive:

  • Innovate. One way to be stand out from your competitors is to actually be different. Be innovative and do things differently. Offer new products and services, or at least new variations of popular goods and services. You can’t just do what other businesses are doing. If you own a janitorial service, for example, you may offer cleanings services that your competitors don’t offer.
  • Focus your efforts in one specific area. Take a good long look at the state of your company, and then identify which area really needs improvement. By focusing your energy on this area, you give yourself a better chance of improving it than if you try to improve everything at once. That kind of scattered approach may lead to lots of plans that don’t come to fruition because you weren’t able to concentrate on them properly.
  • Minimize and eliminate unnecessary expenses. Your business may be in trouble because your expenditures are getting out of control. You can reduce these costs by first tracking your expenses accurately. Then identify which expenses aren’t absolutely necessary so that you can put your money to better use.

You can track how much you’re spending on research, payroll, equipment, supplies, and advertising, and see whether each area needs an increase or reduction in budget.

  • Improve your online advertising. With so many people looking up information through Google and social media, it only makes sense that you establish your brand’s presence online. First you need a website, which you can use as an advertising platform. Here you can include all the information about the products and services you offer.

Then you can also engage in social media. You should use blogs, articles, videos, and email to reach your potential customers. By engaging you’re your customers, you will likely get more sales which in turn will help your business grow.

There’s no doubt that you can help your business grow when you factor receivables. But that’s just part of a bigger strategy. You need to be different, you need to be focused, and you have to improve your online marketing methods too.

Signs Factoring Accounts Receivable Can Help Your Business

Can factoring accounts receivables help grow your business?

That’s a very good question. Most small businesses invariably need more money than what their owners have in reserve. They need to pay their staff, buy supplies, get tools and equipment, cover rent and utilities, and spend money on marketing and advertising.

If this situation applies to your own business, perhaps you’re thinking that a bank loan is in order, or you may even be contemplating using your own credit card to fund your business operations.

But you are not limited to these options. You can also consider factoring receivable. Here are some signs indicating that factoring may be an ideal solution for your needs:

  1. You don’t want to go into more debt. There are many reasons why you don’t want your business to incur any more debt than it already has. Perhaps you now owe a ton of money to the bank or to your friends and family. Adding more debt on top of those obligations may be more than what you can handle.

But with factoring, you don’t have to take out a loan at all. You get an advance of the money owed to you by your customers, and that’s a different thing altogether.

  1. You can’t get a loan. Maybe you already applied for a loan and your application got rejected. There are many possible reasons for this. Perhaps your company is new, and the bank is not convinced you’d be able to pay back their money. Or you have bad credit, which makes you a poor candidate for a loan.

For whatever reason, factoring may be a more viable alternative, since it’s much easier to get. Most factoring companies don’t really care about your credit.

  1. Your give credit terms to your customers. It can be very frustrating when you can’t have the money needed for your business expenditures, because your customers have not paid you in full. Perhaps your agreement with your customers allow them 30 to 60 days to pay for their purchases, in which case you’ll have to wait a long time before you get your money.

If you can’t wait, then factoring becomes a suitable solution. The point of factoring is to get you that money in advance, so that you don’t have to wait at all.

  1. Your customers have good credit and payment histories. This is the most important consideration for factors. If your customers have a very credit history then you’re likely to get your factoring application approved. Also, you may only have to pay a smaller fee than if your customers have spotty payment records.

If any of these apply to your business, then it’s probably time to consider factoring accounts receivables to get the working capital you need. You’re more likely to get financing, and you can use that money to help your business grow.

Why Small Business Factoring May Be Better Than Bank Loans

For a long time, the rule of thumb was – if your business needs more funding, you go to a bank for a loan. But nowadays if you need a quick infusion of cash, small business factoring may be a more ideal solution for you than applying for a working capital business loan from a bank.

Many small businesses have discovered that factoring suits them better than a bank loan. Here are some ways in which bank loans may not be as good as factoring:

  • Your business may not qualify for a bank loan. Perhaps your company doesn’t have much of a history yet, or perhaps the bank simply thinks your business represents too much of a risk for them. When you actually don’t have the option of getting a bank loan, factoring obviously becomes a much more attractive proposition.

With factoring, getting your funding is much easier. In fact, factoring is not really a loan at all. You get the money from your accounts receivable in advance, so what really concerns your factor is the ability of your customers to pay you what they owe you and on time. If you have reputable customers, you’re very likely to get approved for factoring.

  • Bank loans take a very long time to process. Even if you do get the money you need from the bank (which is obviously not a sure thing), the loan application process is still interminably slow. The bank has to investigate the state of your finances so that they can be absolutely sure that you have the capacity to pay them back. This lengthy process can be very frustrating, especially when you need money right away to meet payroll.

But with factoring, the application process is much shorter. After all, your credit rating doesn’t really matter all that much to them—only the credit rating of your customers. So setting up the factoring line takes only a few days, instead of months and you can have access to money which you can then use for truly time sensitive financial issues, such meeting payroll, buying equipment, and covering rent and utilities.

  • You have to worry about how to pay back the loan. This is a natural concern. You have borrowed a huge sum of money, and you have to pay it back along with interest. You will probably wonder if you’ll be able to pay it all back, which can be especially worrisome when you put up your own home as collateral.

But factoring isn’t a loan. So you don’t have to worry about repaying the money. Your main concern is that your customer pays what they owe you and for the most part that’s not really a concern at all. Keep in mind that the factor will investigate the creditworthiness of your customers. If they are not deemed credit worthy then the invoice will not be accepted.

There’s a whole lot less worrying when you engage in small business factoring. You can rest easy knowing that you’ll get the capital you need right away.

Key Aspects That Determine Factoring Business Fees

Just as the banking industry charges interest for their loans, there is no reason for any factoring business not to do the same. After all, how else can they make a profit? Factoring companies will provide you with the cash you need to meet payroll or pay equipment fees, but they also expect to be compensated for their services. They’re not in it just out of the goodness of their hearts.

So how do AR factoring companies determine how much they will charge you? Each company has its own ways of charging you, but in general the fees will depend on the following factors:

  1. Value of account receivables. While the more invoices you involve in the factoring process will help lower the cost of the factoring, the most important is the value of each invoice. Having just ten invoices factored will cost you less if each one is worth $100,000. Having a thousand invoices worth a thousand each will cost you a lot more. That’s because the factor invests time and manpower for each invoice given to them so dealing with one large invoice is a lot more cost-efficient for them than working on a hundred small invoices.

Of course, the most ideal scenario is if you have lots of accounts receivables and each one is worth a lot of money.

  1. The state of the industry. From the point of view of a factoring company, not all industries offer the same level of risk. Some industries are notoriously difficult for a small business to survive. The restaurant business is a good example. Medical clinics, clothing stores, and construction firms are also considered high risk. With these industries, factors usually charge a higher rate, and the advance they offer on the value of the invoices are usually lower than average.
  2. Types of customers. The factoring company will also take note of the kind of clients and customers you have. The factoring company prefers to deal with companies who engage in B2B (business to business) transactions rather than B2C (business to customer). Businesses are more streamlined in their payments, and they usually have enough funds to pay what they owe.

On the other hand, individuals are more erratic. Also, they tend to deal with lower volumes and values, which as what we’ve already mentioned, are not agreeable with factoring companies.

  1. Customer credit. Factors take a very close look at the credit history of your clients. They check to see if they pay their debts in full and on time. They also check on the stability of these customers, because obviously, if they’re on the brink of bankruptcy they won’t be very attractive to factoring companies.

Here your best bet is to have customers with an established credit history, and who have a stellar reputation when it comes to paying their debts. With a roster of such reputable companies, factors will probably be inclined to charge you less in interest and fees. That’s because there’s a low probability that the factor won’t be able to recoup the money they advanced to you.