Companies searching for an unsecured small business loan often find it difficult to secure such a loan in these trying economic times. Lending practices are often so stringent that it’s tough for a small business to qualify for these loans. Couple that with cash flow which slows to a trickle with a late paying customer, and a business may feel a real squeeze.
What else can you do when it’s tough to get a line of credit or your largest customer takes their time paying your invoices?
A proven option is factoring.
Factoring functions like a line of credit, but is different from a line of credit/loan secured by accounts receivable in that it is actually a sale of specific accounts receivable/invoices to the factoring firm. It is a form of short-term borrowing often used to improve a company's working capital and cash flow position.
A loan is gained by borrowing against receivables (debtors) from a factoring company. Loans are paid as receivables when they are collected. In other words, if your customers owe you $10,000 and you are not sure if you will get that money 60 days, 90 days or even later, a factoring company can give you a large percentage of the money owed to you now and then collect the $10,000 from your customer for you, keeping a small percentage as their fee.
1.Your company generates a customer invoice and sends it to your factoring company
2.The Factoring Company sends the invoice to your customer
3.The Factoring Company advances between 70% and 90% of the invoice value to your company (to be determined by your company)
4.Your customer pays the invoice to the Factoring Company
5.The Factoring Company subtracts its fees from the payment and pays a rebate to your company
One of the benefits of a factoring line of credit is that many businesses can qualify, even those who have trouble qualifying for an unsecured small business loan. Unlike the traditional benchmarks used to obtain an unsecured small business loan, the majority of the decision is based on your customer’s ability to pay, not your personal or business credit situation.
This means that start ups, companies close to bankruptcy and even companies that have already filed for bankruptcy or who have certain tax liens and liabilities may be able to qualify for factoring.
Businesses who have good credit, but do not qualify for a large enough line of credit from a traditional bank are also great candidates for a factoring line of credit. Factoring lines can also be added on top of a traditional line of credit to help during peek sales cycles or for seasonal spikes.
time and money by receiving multiple, independent quotes for Factoring
services. Best Business Payroll has arranged with nationally recognized BuyerZone to
customized estimates from a variety of pre-screened Factoring companies–
with no obligation.
Factoring rates are traditionally higher than a bank rate, since your invoices are the only collateral the factoring company has to fall back upon. The factoring company takes a percentage of each invoice you provide to them as their fee, called a discount.
Discounts usually start at 1.00 to 1.50 percent, and then go up .25 -.50 percent incrementally every 10-15 days thereafter against the funded invoice. range from 1.25 percent to 5 percent for every 15 days an invoice is funded.
These higher rates may initially seem to be a negative; however, increased cash flow can actually significantly improve the financial health of your entire company, resulting in more robust growth overall: an increase in sales, reduced overhead, increased production and reduced bad debt which all leads to higher profitability.
Most factoring companies won’t just take on one or two of your slowest paying customers; however, some factoring companies will engage in what is known as “Partial Factoring”, which is when you choose one customer or a small group of customers to factor for.
If the majority of a company’s customers
pay on time, it may not be cost-effective to pay for factoring for every
customer. This is when partial factoring may be the best solution. Factoring becomes like your own personal ATM.
The bottom line is that factoring can be a great alternative to a traditional unsecured small business loan if conditions are right within your company.
It can eliminate slow cash flow, freeing up capital to increase your company’s productivity and growth.Home › Factoring: An Unsecured Small Business Loan Alternative