How to Finance a Small Business With Factoring

Finding business financing is difficult for many small business owners. There really aren’t many sources of funding for small companies, outside of family members, friends, or perhaps some select private investors. However, most small businesses need financing at some point if they want to grow the company.

Cash flow problems are common

Most companies seek funding because they have cash flow shortage – a common problem for companies that focus on commercial sales. Because most commercial sales are done on term credit, the small business must give the client 30 to 60 days to pay an invoice. And if you are dealing with large companies, term credit is a must if you want to be competitive. If you don’t offer payment terms, clients will go to a competitor who does provide payment terms.

Why do companies ask for payment terms?

Large companies ask for payment terms for one simple reason: it improves their cash flow. They use your products and services for free until it’s time to pay. Obviously, it’s a great deal if you can get it. But it has the insidious effect of forcing small companies to finance larger and more stable businesses.

In the end, this scenario is a catch-22. If you offer trade credit, you risk cash flow problems. And if you don’t offer credit terms, you won’t be able to grow. So, how do you escape this dilemma? It’s simple – finance your invoices.

Use invoice financing to offer terms

One way to offer terms when you can’t afford to is to finance your invoices. Basically, you work with a financial intermediary who advances money using your invoices as collateral. You get funds as soon as you invoice your customer without having to wait until they pay. The transaction concludes once your customer pays their invoice, on their usual terms. This type of facility allows you to offer terms with confidence.

You can read this article to learn more about factoring and how it improves your cash flow.

Improve customer credit

You can only factor invoices that are payable by creditworthy commercial clients. Your customer’s credit is important because their invoice, and their ability to pay on time, backs the transaction. As a result, factoring companies check the credit quality of your invoices before financing them.

Many small companies use their factoring intermediary as an adjunct credit department to help determine which customers get payment terms and which ones should pay upon delivery. This advice helps improve the quality of your client base and decreases bad debts.

Ideal for small businesses

Factoring can be ideal for small companies for a number of reasons. Obviously, it improves your cash flow and enables you to offer terms. However, the solution is also flexible and can grow with your business. It will be there to support your credit sales as you grow your client base.

One important benefit is that qualifying for factoring is relatively easy, even for a small business. The most important requirement is to have high-quality invoices. Aside from that, your invoices should be free of liens and your company should not have serious tax or legal problems. Because of these easy requirements, a small company with a solid roster of quality clients can usually qualify for funding.

Get an instant quote

Are you looking for a small business factoring quote? We can provide high advances at low rates. For information, get an online quote or call (877) 300 3258.