Factoring is not for every business. For example, if you have a bank line of credit adequate to handle your company’s operations (lets say 80% or greater of your monthly accounts receivable), then factoring probably isn’t beneficial to your business. If it is any less than that amount, your business may be suffering.
With that said, even with an adequate bank line of credit, ask yourself what happens when you begin to grow?
For Example, let’s say you are writing approximately $100k per month in sales. Let’s also assume you have a bank line of $80k. Your business runs well. But, (always a but) what happens if you grow too quickly? This month $100k, next month $140k, the following month $150k. Simply put, your bank line is inadequate. Right?
For a bank line of credit and needed additional capital, you must jump through hoops to prove to the bank you need it’s money. With factoring 80% of your receivables are available to you immediately. This month $80k, next month $112k, the following month $120k, and all on the day you invoice your client (presuming the work is done or the product delivered) wired immediately into your account.
No more waiting on payment. Bank lines of credit also come with hidden fees that factoring does not. For example if you use less than the $80k bank line of credit some banks will hit you with fees. So although the banks may have lower rates to draw you in they make their money on FEES!