Plan ahead, finding working capital

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Although the global economy has begun to show signs of returning to good health, many businesses – especially smaller and medium-sized entities – find it virtually impossible to secure financing through traditional channels. Planning ahead and finding a Factoring Company that suits your particular business needs takes the worry out of implementing a factoring solution for working capital.

When Banks Won’t Help

For new businesses or smaller concerns, convincing a bank to invest is still an uphill struggle. For example, many businesses operate at a loss for a good while before they see profit. Often, this is because they are building the business infrastructure, promoting the brand and investing to grow – see online retailer Amazon for a great example.

When a bank looks at the books, however, all they see is a business with little capital and few assets. They see this as a risky investment and will pass.

Factoring, on the other hand, comes with no such restrictions. Factoring offers a great way to gain working capital, without the drawbacks of taking a loan from a bank. The advance from factoring, for example, comes from income the business has already generated but has not yet ‘unlocked’. The business is not going into debt, it is simply paying a very small percentage of the value of their receivables to gain access to the finance they need.

For businesses that do not have the credit history or assets that a bank demands, factoring offers a quick – funds usually arrive in 24-48 hours, sometimes faster – way to raise finance, either for day-to-day operations or for investment into the business.

In this sense, factoring offers a much quicker and easier way to access the finance they need than traditional bank loans.

  • Many businesses – especially smaller, newer concerns – still struggle to gain finance from banks.
  • If the business has a poor cash flow and negligible assets, banks often see a risky investment and shy away.
  • Factoring does not come with the same restrictions. Finance comes from money the business has already generated, factoring just helps unlock it.
  • The business does not assume any kind of debt from factoring, which means no risk of foreclosure or default.
  • If a business has reached the point when bank financing is definitely off the cards, factoring can help in day-to-day and future operations.

Gauging Who to Work With

Once a business reaches a certain size, or even if it just wants to make prudent choices on whom to work with, factoring can provide a solution.

As well as working as a way to generate quick finance, factoring has other uses. It can offer a great way to assess the credit worthiness of other businesses and whether they are worth working with.

For example, a good factoring company, during the course of their collections, will assess the creditworthiness of concerns that owe the business money. If payment is quick and forthcoming, then the factor notes this, as most factoring companies build files on companies that they deal with. This makes it easier for them to contact and deal with them in the future.

However, if a business is slow to pay or does not pay at all, or a factor refuses an invoice to a certain company, then this is a sure sign that something is not right.

Using factoring in this strategic way to test companies can save businesses money further on and helps a business only build strong working relationships.

  • As well as providing finance, factoring can help a business work out which businesses are worth working with.
  • Firms that settle invoices quickly and in full with factors show themselves as good to work with.
  • If a factor refuses an invoice from a certain company, the business can take that a sign that the company might give them problems.

Understand Factoring 

Before any business – small, medium or large, decides to use factoring, it is vital that they fully understand what the process is and how it works.

Many businesses have caused problems for themselves because they did not understand, or rushed into, attaining finance without understanding the mechanisms behind it. For some businesses, factoring will represent an entirely new way of generating cash flow, so they have to know exactly what it means and what it entails.

At the basic level, factoring is not too complicated. It essentially provides finance for a business by turning their outstanding sales invoices into cash.

A business sells something – in this example, shoes, and delivers the required goods to a retail business. With the delivery of the shoes, the business also sends along an invoice. The factor – which could be a private company or bank – pays the business a percentage of the due invoice. The amount varies from factor to factor, ranging from 75 percent up to 90 percent with some.

Instead of paying the outstanding invoice to the supplier the retailer that received the shoes will instead pay the account directly to the factoring company and subsequently the factor will then pay the previously unadvanced portion of the invoice to the supplier minus their fees

This is the basic function of factoring. Some businesses – perhaps those on the smaller end of the scale – might not want to lose 2- 4 percent of their receivables until they grow more. Alternatively, for a firm struggling to keep up with accounts and without an accounts department, factoring might help them collect their receivables and provide a credit and collections department for them.

  • Factoring allows a business to generate money from their own receivables.
  • A factor usually takes between 2 to 4 percent of receivables as a fee, with everything else going back to the business.
  • For businesses with lots of due invoices, but no collection or credit department, factoring provides these services.

In the past, many businesses were reticent to use factoring. It was seen, by many, as a last resort.

Many concerns considered factoring the equivalent of panic-selling receivables to cover holes in the business’s finance, and thus would reflect badly on the business. Alternatively, others considered it as a form of ‘sending in the heavies’ to settle invoice balances. Some businesses that used it worried that they would alienate customers or firms they worked with by using factoring.

However, that is no longer the case. The wider view and the practices of the factoring industry – and it is now definitely an industry – have dramatically changed. Today, businesses use factoring in a wide range of different ways.

Deciding if and when factoring is right for a business requires examination of various considerations. Working out the right time to use factoring could provide short-term or long-term benefits, depending on the needs of the business.

What do you think?