Small businesses are now turning to factoring as a more viable way of getting funding. While there are several drawbacks (it seems more expensive than getting a traditional bank loan), small business factoring offers numerous advantages. Here are 10 of them:
- You’re more like to get the funding you need from a factor than from a bank. Community banks are becoming fewer, while big banks deny almost 80% of all loan applications from small businesses. Meanwhile, it’s very easy to find a factoring service online that’s willing to provide you with the financing you need. This is true even if you’re a new company or you have bad credit.
- The loan application doesn’t need a lot of effort. With banks, you need to prepare a lot of paperwork to prove that you’re a good business to lend to. But factors only investigate creditworthiness of your customers.
- The loan application only takes a short time. In fact, some factors may only take as long as 48 hours to decide if they will be financing your company. That’s a vast improvement over the months it takes to complete a bank loan application.
- You’re not required to personally guarantee the loan. Some banks even require you to put up your personal assets for your business loan, but this is not necessary for small business factoring. You only need to guarantee against disputes or fraud.
- The financing is not considered a loan. This makes your balance sheet look more attractive, which will be important if you’re selling equity or trying to obtain other sources of funding.
- The factor takes care of monitoring the invoices and collecting the payments. This frees you up from the overhead costs of maintaining a department for such a purpose, and you can concentrate on running your company. The factor can usually collect the payments in a professional manner.
- You can get credit info on your customers. As have been mentioned, the factor investigates your customers, so you will find out which of your new customers are likely to pay within 30 or 60 days. This may prevent you from offering terms to customers with a history of not paying in full or on time.
- Your financing grows as your sales increase. This means you can easily fund your business growth. Factoring involves getting an advance based on your invoices, so the more money involved in the invoices the more money you can get in advance.
- You can pay off your suppliers early and get discounts in exchange. Also, your improved cash flow can allow you to buy greater volumes of supplies which can get a discount as well.
- Your customers may be encouraged to pay on time. That’s because some factors report to credit agencies. And if your customers are aware of this, they may wish to pay on time to improve their credit rating.
These are just some of the advantages of small business factoring. So if you’re running your own business, you may want to consider factoring if your local bank is making it difficult for you to get the financing you need.
