How to Find Out if Factoring is the Best Option for Your Business
Being a small business owner has its shares of important decisions, not the least of which is how to secure necessary financing. It may be that your business is seasonal, or your business could be growing at a faster rate than you have the working capital to handle. One way that small businesses can find much needed funds to increase cash flow, without going into debt, is called factoring. In the simplest of terms, this just means selling your unpaid invoices to a factor company at a discount.
Here’s how to determine if this is the best option for your business.
Does Your Business Have Accounts Receivable?
Obviously, in order to sell any unpaid invoices to a factor company, you must operate a business that generates invoices. If your business provides goods or services to customers, then accounts receivable might work for you. Many factor companies want you to sell large batches of invoices or all the invoices from one customer. If your main business operations do not generate many monthly invoices, this type of financing may not be the most suitable for you.
How is the Credit of Your Customers?
One of the appeals factoring holds for many small business owners is that factor companies generally care more about the credit worthiness of your customers more than that of your business. This makes securing approval easier than trying to get approved for a small business loan. If your customers have good credit and regularly pay on time, then selling their invoices could help you get payment faster than the net 30 days regularly associated with invoice payments.
Do You Have a Clear Idea of Your Financial Needs?
Last, but certainly not least, it is very important to have a good understanding of what will and will not work for your company when it comes to terms and fees. Just like with banks, factor companies each have their own conditions, fees, and services. Do they handle collection? What is the discount rate? Are there any additional charges? Before deciding to sell your invoices, make sure the terms work for your individual business needs.
Whether your small business is in an off-season slump or experiencing sudden growth that requires an increase in cash flow, selling your outstanding invoices to a factor company can help you find funds quickly and without increasing debt. If your business has a substantial amount of accounts-receivable and customers with a good repayment history, then factoring could be just the financial solution your business needs.