Growing, expanding and running your business requires cash and funding. Many companies find this needed cash through traditional funding situations like bank loans. However, these don’t work for every business. When a company has unique funding needs they often look for alternative options like factoring. But, often times you’re left thinking: will factoring work for my business?
What is Invoice Factoring?
One funding option is invoice factoring. Businesses or companies can sell their accounts receivable invoices (at a discount) to a funding source for cash, essentially factoring future payments for funding now.
But, would factoring work for your business?
Isn’t Factoring Just For Large Companies?
At one time, this was true. Now, it’s for any company looking for funds to meet their business goals.
What industries benefit? The better question may be which industries don’t qualify as good factoring candidates. Industries that see success with invoice factoring include:
- Oil and Gas
- Temporary Staffing
- Clothing, including textiles
- Trucking & Freight
Will Factoring Work for My Business?
The benefits of factoring are numerous, but not every company will see the same gains or funds. So how do you know if factoring works for your business? Industries and companies that benefit from invoice factoring have these common factors despite their differences in industries:
- Creditworthy Business Customers
- Higher Invoice Amounts
- Sound Business Practices
- Higher Profit Margins
But, not all businesses are eligible or suitable for factoring within those industries. For example, a business that sells directly to individual customers is less suitable than a business that sells directly to other businesses. Why? Companies that serve consumers often lack the minimum credit terms factoring companies require.
Invoice Size Requirements for Factoring
With it’s name, it’s obvious that one major requirement for business to qualify for invoice factoring is their invoices—and their size.
Unlike consumers, businesses present invoices with a higher face value. Factors assess invoices individually for risk, not the company as a whole. For this reason, they look for businesses with large, individual invoices over multiple, small invoices. The more efficient and cheaper process makes companies with larger invoices more eligible.
On this note, businesses with a tight profit margin may not benefit from factoring. Companies with small margins for profit depend on the volume of consumers to stay afloat leading to numerous invoices for small amounts instead of large invoices spaced out over time. This makes factoring an expensive funding option for these companies.
There is no designated number of invoices that makes factoring an excellent funding source over a poor funding source. Instead, their funding needs and relationship with the factoring company determines the number of invoices required.
How Are Factors Different Than Loans?
Unlike factoring, loans encumber assets. With factoring, companies sell future income in the form of invoices at a discount for funds now, fast tracking the profit margins.
Let’s look deeper into the benefits of factoring over bank loans.
- Easier Qualifying. Factoring agencies can factor to businesses that banks would normally deny. Banks only lend to businesses with low risks, while factors consider credit on an invoice-to-invoice basis.
- Efficient and Effective. With factoring, companies receive their needed cash flow within days—sometimes within 24-48 hours of submitting their invoices. On the other hand, bank loans may take weeks to months for approval and the releasing of assets. When you need cash now, factoring works best.
- Banks are rigid, setting strict contracts setting loan payments with predetermined interest rates per month. If a business requires more cash, that means another loan and more interest. With factoring, flexibility reigns. The business controls the amount of money needed each month by the number of invoices they submit.
- Credit Solutions. Bad credit does not automatically disqualify your business in factoring. For factor agencies, they care more about the risk and credit of the business paying the invoice. If the invoices are paid on time, that’s the credit that matters. Some details about how the business is run and verifications are required, but the key is customer worthiness.
Let’s go back to the question: Will Factoring Work for My Business? The answer is yes, if you have the right qualifications and invoices. Small businesses with larger invoice sizes, business to business transactions and trustworthy clients see the most benefits from factoring. But, that doesn’t automatically exclude your business if you don’t meat those requirements. Contact Blue Ridge Factors today, talk with a factoring professional and find a funding plan tailored to your company’s unique needs.