When starting a business, most of us look to banks for financial means of operation. Bank lending, however, has many hang-ups, can be tricky to navigate, and may be difficult to qualify for. This makes our means for developing or gaining momentum in our business difficult—it may seem impossible to start or get ahead!
Did you know? There is another option!
What is “Factoring”?
Factoring is a finance option that offers freedom that bank lending does not. This means of financing is not so much a loan as a transfer of services.
Typically, a business would need to wait for the receipt of payment for either product or services rendered before financing more product, or funding operations to keep providing service. When factoring is used, the need to waiting is removed!
A factoring company will take over for your business directly after the goods are sold or the service is rendered. These companies pay cash to your business up front, then pursue the payment from clients independently.
Benefits of Factoring
Financing from factoring companies can be much easier to obtain than bank loans, because factoring is not based on your business’s credit history—it is based on the credit history of your clients. This can be invaluable when starting a business from scratch, or building a business with prior credit problems.
With factoring, your business does not suffer from a “lag time” between overhead and profit, thus providing the financial freedom to grow your business and become more efficient. Having access to the unlimited capital that factoring provides allows your business to grow exponentially without worry of running out of cash to pay your bills. Some companies even advance up to 95% of invoices within as little as 24 hours.
Imagine, your wholesaler is offering a great discount on product if you act quickly, but you haven’t yet received the cash from all the credit card sales generated over the last few weeks, so you don’t have the capital to take advantage of the wholesale discount. With factoring, this would never be a problem.
Beyond business growth, factoring companies are beneficial because they act in place of highly skilled employees, or even whole departments of employees, that your business won’t need to hire. This alone will dramatically reduce overhead and eliminate stress over billing, account settlement, and client credit. Additionally, your business will be more likely to attract and retain financially responsible clientele because of the factoring company’s collection process.
Since factoring is not a loan of money, your business credit will appear to be more favorable when buying expensive equipment or making larger investments that do need to be financed.
Factoring provides a great option for small startups to grow quickly without limits. Consider it as an option if you are developing a business!