What Is Commercial Factoring?
One of the major problems inhibiting the growth and success of new businesses is the lack of adequate financing. In order to stay afloat and continue to expand, there has to be a steady stream of funding to work from, and for a new business, it can be difficult for your cash flow to keep up with your costs, especially when the sale to collection delay can be anywhere from 30 days to three months. Commercial factoring can help you eliminate this delay and get cash when you really need it.
Practical insights for business owners planning their next funding move.
One of the major problems inhibiting the growth and success of new businesses is the lack of adequate financing. In order to stay afloat and continue to expand, there has to be a steady stream of funding to work from, and for a new business, it can be difficult for your cash flow to keep up with your costs, especially when the sale to collection delay can be anywhere from 30 days to three months. Commercial factoring can help you eliminate this delay and get cash when you really need it.
In a commercial factoring transaction, a company (the factor) purchases your accounts receivable at a discounted price. The factor will pay you immediately, and the debtor now owes the balance to the factor. Essentially, for a small price you can use your assets immediately instead of having to wait for the debtor which can take months.
What are the advantages of using commercial factoring?
The obvious advantage is the immediacy. Instead of collecting the money on your own, you receive payment almost instantly – only the time required for shipment, delivery and invoicing, which can be less than 24 hours. New businesses without a heavy cash reserve often don’t have the cash reserve or luxury of being able to wait, so factoring eliminates the delay. Another advantage is that factoring is not a loan. Your business’ credit will not be considered in a factoring transaction. You are selling an invoice directly to the factor, so the only credit in question is that of the debtor. In fact, since the factor will do a full credit analysis of the debtor, you are entitled to use that information in your future dealings with that client. Plus, since you are outsourcing all the commercial receivable management, you can focus your time, energy and funds on other tasks.
What kinds of businesses can benefit from commercial factoring?
New businesses often don’t have the funds or the reputation to have good enough credit for traditional lending options, so factoring is particularly appropriate for them because it is not a loan. Your business may qualify for commercial factoring even if you have a tax lien or have declared bankruptcy. Since new businesses often struggle with adequate funding, timely cash flow, and bad credit, commercial factoring can eliminate all of these worries. Another reason commercial factoring is particularly lucrative for new businesses it outsources your accounts receivable and invoicing. Factoring relationships are generally long and steady not just one transaction. Finding a well seasoned factor at a reasonable price that will take proper care with your invoices will be good for your business’ reputation while letting you focus on expanding your new brand.
When is the best time to use commercial factoring?
Many companies do not know about the advantages of commercial factoring. Generally, when a company starts using factoring they continue to use it frequently, having established a good relationship with their factor. Commercial factoring is going to be most lucrative and useful when your company is just getting on its feet, since it allows you to circumvent credit issues and payment delays. Check out the WSJ’s How to Use Factoring for Cash Flo factoring guide to see if factoring is right for your business.