There was a time not so long ago when factoring had a bad rep in the business world. Some considered it a commercial version of payday lending, and others regarded it as the only viable financing option for struggling companies. But while it is true that companies with bad credit and no collateral make extensive use of accounts receivable factoring, many others have found it an ideal way to get financing.
- Fewer business loan applications are approved by banks. In 2012, the National Small Business Association reported that 25% of small businesses didn’t have the necessary capital to fund the growth of their company. Many business owners find it difficult to stay afloat even when market opportunities are presenting themselves. Yet in December 2012, it was found that of the small business loan applications less than 15% were approved.
In contrast, applications for accounts receivable factoring have a much higher chance of getting approved.
- Bank loans take an inordinate amount of time. Banks like to investigate every little detail about the business who wants to borrow their money, and because of that, loan applications take weeks or even months to get processed. In contrast, factoring applications only take a short while because only the quality of the invoices is investigated. And once your business has a relationship with a factor and you keep the same customers, you can get the funding you need even faster.
- Factors don’t require any other type of asset as collateral. The invoices are more than enough. In contrast, many banks require business owners to personally guarantee a business loan and this may require them to put up their personal assets as collateral just so they can get the money the need for capital.
- Factors offer many services that banks don’t. Factors investigate the credit worthiness of your customers to see which ones are known to pay in full and on time. Their investigations can help you identify which companies deserve your business and which ones are best avoided. Factors also assume responsibility for processing the invoices and collecting the payments, and this means your company may be spared from having to set up a separate department for this sole function.
- Factors don’t set limits with what you can do with your cash advance. When banks offer loans, often they want some input as to where you should spend that money. Banks want to be sure that they will get their money back, so they set limits on what you can and cannot do with the money.
In contrast, factors don’t care how you use the money. Once you get the usual 80% of the value of the invoice, you can use it to pay your employees, cover your overhead and operational expenses, or pay of your outstanding debts.
- Factoring is technically not a loan. When you avail of factoring services you won’t have any debts listed on your credit report, because the money you get is an advance and not a loan. It does not affect your credit in any way.
With accounts receivable factoring, all these benefits are yours to enjoy. No wonder the demand for these alternative forms of financing continue to increase every year.