When your business needs a quick infusion of cash, it’s imperative to weigh the various options available to you. For example, would your company qualify for a small business loan? Do you want to obligate your business to repaying the debt? Do your entity’s accounts receivable offer reassurance your company can afford to repay a loan?
If the answers to any of those questions is no, a small business loan may not be the right option. How about selling your accounts receivable?
One way to accomplish that is by factoring, a financial method in which a business owner sells their entity’s accounts receivable at a discount to a third-party. Factoring is an excellent way to raise quick cash.
Factoring is better suited for some industries than others. For example, the retail industry accounts for the majority of accounts receivable transactions, with the clothing industry leading the pack. That’s because long receivables are already part of the business cycle.
In a typical factoring situation, the small business owner makes a sale and then delivers the desired product or service. Doing so generates an invoice. The funding source, known as the factor, purchases the right to collect on that invoice by agreeing to pay the business owner the invoice’s face value discounted by an average of two to six percent. The factor pays approximately 75 to 80 percent of the account receivables’ face value when they make the purchase, then pay the balance, minus the discount, when the original customer pays the invoice.
Factoring is not a loan but rather the sale of an asset, the invoice. The factor only makes money when customers pay their invoices in full, so the factor is most concerned with the financial viability of a small business’s customers rather than the financial strength of the entity itself.
One of the greatest benefits of factoring for a money-starved business is that it has cash-on-hand versus needing to wait until a customer pays to enjoy the flush of cash. That luxury supports efforts at bolstering or strengthening a business venture.