Many small new businesses don’t yet qualify for conventional financing since they haven’t yet developed a solid credit history. Unfortunately, these are just the companies most in need of extra working capital to meet their day to day needs. If you are the owner or director of a fledgling enterprise in need of a loan, have you considered invoice factoring? This is perhaps one of the least known types of business financing available but one that is easy to qualify for if you meet a few basic requirements.
An Introduction to Factoring
In simple terms, factoring is a loan against your outstanding books. A lender, in this case called a factor, will lend up to 80% against qualified invoices which are outstanding. However, it should be made clear that the invoices must be commercial invoices – B2B accounts.
Once the factor agrees an amount to lend, they will literally take over your books. You will no longer need to hound your customers for payment as that will be the role of the lender. As payments come in, the factor will keep track of what has been received and apply that amount to what is owed towards the loan. TBS invoice factoring is a good example of a company and also provides some extra insight into the process.
Benefits of Factoring
There really are quite a few ways in which factoring can benefit a business. Bearing in mind that a company’s credit rating plays a huge role in the availability of loans, it is easy to see why factoring would be helpful to businesses that haven’t yet had time to build a solid history. The outstanding invoices are the security needed and the company’s credit score takes a back seat to the amount payable to them. So then, the biggest benefit is in the fact that little emphasis is placed on creditworthiness of the borrower.
Then there is the fact that the factor goes about collecting on those invoices. The company directors are able to focus on day to day operations without stressing over who has paid what and when. The factor carries that burden in order to recover the amount (along with interest and service charges) owed to them by the borrower. Money is made available almost immediately which will enable the company to move forward.
A Few Disadvantages
Although factoring enables a qualified business to quickly inject money into the company, there are some downsides to be aware of. It was mentioned above that the creditworthiness of the borrow is not a huge factor in qualifying for the loan but unfortunately, the debtors’ credit history will be carefully scrutinized before money is lent against that debtor’s account.
Also, many companies find that there is a significant cost in exiting the loan. It is advisable to choose a factor carefully as some offer much higher rates, service charges and exit costs. A third disadvantage lies in the fact that you can no longer fly under the radar. Your customers will know that you sought out financing because the factor will be contacting them to collect on your behalf. After all, they figuratively bought your books from you and it is their contractual right to contact ‘their’ debtors.
It is important to weigh the advantages against the disadvantages before entering into a factoring contract. If cashflow is a serious problem and money is needed immediately, this may be the best solution. Just be aware of the fact that your customers will know that you borrowed money and there will most likely be some sort of exit fee assessed. In the end, it is a judgment you will need to make. Factoring may not be widely understood but it is surely a great way to get your hands on cash fast.
