Top Reasons for Factoring and How Your Business Can Benefit

Cash flow and access to working capital are two of the biggest headaches for business owners, especially for small, new, or rapidly growing businesses. Why? Often it comes down to how quickly customers pay outstanding invoices. One customer with a slow or late payment—even if the invoice isn’t really large—can create a cashflow crunch. This in turn can lead to other problems, like being late on supplier payments, struggling to make payroll, and missing out on new business opportunities, among others.  

You might be thinking: won’t a line of credit solve the problem? Sometimes it does, but sometimes it isn’t the answer. If a business is young, hasn’t secured bank financing, or there’s a creditworthy concern, traditional financing like a line of credit or loan isn’t possible.  

There’s another answer, though: factoring. This article explains what factoring is, when to consider factoring, and the top reasons your business can benefit from factoring.   

What is factoring?  

Factoring, or the purchasing of accounts receivable, is also known as invoice factoring and accounts receivable factoring. Factoring is a financing method that gives businesses quick access to working capital. Businesses sell their unpaid customer invoices for the services they have already performed or products they have already sold. They provide their unpaid invoices to a factoring company, which then provides a cash advance to the business. The factoring company then collects payment from the customer, paying the business the remainder of the invoice amount minus a fee.  

When should a business factor?  

There may be many reasons why a business could need to or would benefit from factoring. These can include access to working capital to bring a new product to market, invest in new product, meet the needs of a new or larger customer, compensate for delayed payment, or address a seasonal cash flow fluctuation. Or, a business could be rapidly growing, or have not yet met the requirements for bank financing or other more traditional financing routes.  

Many businesses do not know about or overlook invoice factoring as an option for short-term financing. Sometimes, though, it’s a wise financial decision. Consider factoring as an option when:  

•  ​The gross margin on your next sale exceeds the cost of factoring. 
• You can win or service new business by factoring, and it will increase your bottom line.  
• Collection costs are more than the cost of factoring.   

 Top 10 reasons to factor your invoices 

Businesses may overlook or avoid factoring, but factoring invoices can benefit businesses, especially those that need access to working capital, are growing rapidly, or have experienced difficulty with other means of short-term financing. Our Top Ten Reasons to Factor is one of the most popular pieces of content on our site and often answers many questions prospective clients have about factoring. These top reasons to factor your invoices are:  

• #1. Fuel growth without giving up equity. When you’re growing fast, a partner might offer financing in return for an equity stake, but this can introduce new problems. Factoring gives you access to working capital without the need to give up equity.   

• #2. Improve cash flow management. Make money when you make a sale and leave waiting for payment to the factoring company.  

• #3. Reduce bad debt. Decrease risk by selling only to creditworthy customers. The right factoring partner will help you determine who is creditworthy, and who isn’t.  

• #4. Improve your credit rating. Don’t be the bad debt risk when it comes to your suppliers. Pay your suppliers and vendors on time and build a better business credit rating.  

• #5. Take advantage of supplier discounts. With more access to working capital, you might be able to negotiate better prices from suppliers, increasing your profitability.  

• #6. Win new business. Never walk away from a new sale or customer because you lack the cash flow to service the business. You’ll be able to grow faster with access to working capital that you can turn into new sales—and profits.  

• #7. Reduce or eliminate slow-turning receivables. Sometimes delayed payments are actually the fault of your business—through clerical errors or incomplete information. Be more precise with invoicing and get paid faster working with a factoring partner.  

• #8. Don’t wait for bank financing. Banks often do not lend to startup companies or newer businesses, which can leave them without access to the working capital they need to grow.  

• #9. Overcome creditworthy concerns. Lenders may refuse a loan for many reasons, including customer concentration that might result from new business opportunities or rapid growth. The right factoring partner will work with you even in this situation.  

• #10. Cost savings. Making money—and collecting it—can cost you money. The right factoring partner can take on some of the administrative burden of managing your invoicing and accounts receivable—potentially saving you on headcount or allowing your staff to focus on other tasks.   
  
  

Factoring can give businesses fast access to working capital, even in situations when other financing is not available.

We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.