Having a small business is no easy feat. One of the most common challenges faced by small and medium enterprises is effective cash flow management. Many businesses suffer from slow payment cycles which make it tough to manage operational costs and investments. But there’s good news! One solution available for small businesses is called factoring.
Factoring refers to a specific type of financial service where a business sells its accounts receivable (invoices) to a third-party company called a factor, which provides immediate cash instead. This is advantageous particularly to smaller-scale businesses that need to quickly obtain capital but don’t want to wait for customers to pay beforehand.
This blog post will delve deeper into what small business factoring options are available, how they work, and why they may be the ideal way to enable better cash flow management and grow your business.
What is Small Business Factoring?
Small business factoring refers to an option of financing that enables companies to receive cash for their outstanding invoices through a factoring company. With small business factoring, companies do not have to wait for customers to pay. Instead, companies can get up to 90% of the invoice amount within days after they submit the invoice to their factor. From then onwards, the factor takes care of collecting the money from the customer.
Factoring enables rapid access to funds that a business could use to operate. Upon receipt of the customers’ money, the factoring company pays the business the rest of the invoice, withholding only their portion.
Different types of factoring are available, each with a distinct set of benefits and drawbacks to consider. Let’s explore the most popular options available for small business factoring.
Types of Small Business Factoring Options
- Recourse Factoring:
Recourse factoring represents the most popular type of factoring. In this scenario, the company is responsible for any unpaid invoices. If the factoring company fails to collect payment from the client, the company has to pay the factor back.
Although this solution frequently comes with fewer charges, it is a lot more risky. If a client does not pay, you would need to buy the invoice back and reimburse the factoring company, which can be financially naked for your small business.
Recourse factoring is, indeed, the most popular type of factoring for businesses with good clientele who pay their invoices. This type is also good for companies that want an inexpensive factoring option.
- Non-Recourse Factoring
This type of factoring is similar to recourse factoring, but the difference lies in the risk of the customer type. Non-recourse factoring passes the risk to the factoring company in the event that a customer does not pay the invoice. This places the business in a position where they can default and not be required to pay the factor.
With a non-recourse factor, a business receives more protection but generally is subject to paying higher fees owing to the increased risk the factor takes. This is the type businesses that do not want to deal with unpaid invoices.
- Invoice Discounting
This is another approach to small business factoring which allows companies to draw money against their invoices without a third party factor collecting money for them. Unlike with some types of factoring, a business with invoice discounting manages its own collections. The only service of the factoring company is to provide funds.
Here the company is taking a loan from a factor against unpaid invoices with some interest rate, and repay the loan once the customer pays. This option is great for control purposes, but a less established credit or financial history makes this harder to qualify for.
Invoice discounting is excellent for businesses needing immediate cash but prefer to maintain control of customer relations and collections.
- Spot Factoring
This is a type of small business external financing that allows for the sale of individual invoices or collections instead of selling a firm’s entire portfolio reaching out to a bank. For companies that want cash fast, but do not want to enter into a long-term factoring contract this is ideal.
Spot factoring allows businesses to sell particular invoices to a third party for collection and enables them to pick and choose on a case by case basis. Unlike traditional factoring agreements, this is much more flexible. This option is particularly useful for businesses with fluctuating cash flow needs or capture cash during a shortage.
While spot factoring is flexible, it does impose restrictions like higher fees. Given that the factoring company takes on much more risk with each invoice, they do impose charges.
Benefits of Small Business Factoring
- Improved Cash Flow
Businesses often wait 30-90 days for their customers to settle their bills. Spot factoring helps small businesses get paid immediately and consider Business Development without the need to wait for cash. Most importantly, businesses can use these funds to settle operating costs, employee salary payments, and growth funding.
- No Need for Collateral
Unlike Loans and lines of credit, collateral isn’t required for invoice factoring. The invoice itself, eliminates the need for the business to own significant assets to serve as financial backing. Especially useful for small businesses missing primary and secondary assets to use as a loan collateral.
- Invoice Factoring Accelerates Fund Access
Faster access to funds can be achieved through invoice factoring that provides businesses with funding days after submitting their invoice. Unlike applying for a business loan which can take weeks to process, factoring provides businesses with a much faster option to obtain funds. The speed and efficient nature of factoring provides businesses with the ability to attend to urgent financial obligations and seize growth opportunities.
- Factoring Services Allows for Outsourced Collections
With the use of factoring services, businesses are now able to outsource collections as well. With this service, a company is no longer responsible for collecting payment from their customers. This saves the business a lot of time and resources that would have been spent handling collections. With this service, a business can now focus on core activities while the factor takes care of accounts receivable processing.
- Variety of Small Business Options
Flexibility is a virtue. This is especially true when selected small business factoring options as there are multiple choices of financing solutions to meet your specific needs. You can choose to go for recourse or non-recourse factoring, spot factoring or invoice discounting; all methods achievable depending on desired cash flow and overall business goals.
Why select Simply Factoring Brokers for your small business factoring needs?
Simply Factoring Brokers specializes in industry specific business solutions. We help small businesses understand their factoring options and help them choose what suits them the best. Here’s how we can assist your business:
- Customized Solutions
Our clients come from diverse industries, each having unique challenges and requirements. Our team ensures we understand your factoring needs and financial objectives before providing any recommendations to guarantee we identify the most appropriate factoring solution for you.
- Professional Guidance and Customer Care
Our seasoned professionals have helped countless customers with their factoring needs. Whether you have years of experience in factoring, or have recently started exploring your options, our knowledgeable experts will assist you in every step of the way.
- Multiple Trusted Lending Partners
Having a wide network of trusted factoring companies allows us to secure the competitive terms and rates for your business. More lenders means greater versatility and choice when it comes to the most optimal factoring solution for you.
- Straightforward Application Procedure
Time can often be a constraint for many businesses, especially when trying to obtain financing. We strive to guarantee fast approvals and funding at the earliest, utilizing a seamless and efficient application process.
Take Away: Determine Which Small Business Financing Options Are Best for You Today
Options for small business financing help to improve the cash flow and support growth. Whether it’s time to fund your operating expenses, expand your business, or manage seasonal shifts, small business loans provide the funds within no time, unlike a traditional bank loan.
For many years, we have been committed to helping small businesses get the best factoring solution that can enable them to reach greater heights.
Connect with us to receive expert assistance tailored toward optimizing your business growth with the right small business factoring solution today!