It can happen to the most profitable of all businesses. But for a small business, a cash-flow pinch caused by big but slow-paying customers can spell financial disaster. To add to this, it is harder for small businesses to buy at lower prices and on credit than the goliaths of the same industry.
Take the example of a store. The big retailers get special high-volume discounts and are extended credit by the vendors. Unfortunately, the small mom and pop shop is not given the same luxury. The small boutique is forced to pay higher prices because they have less floor space and less storage space, and they have to pay with liquid capital. In their case, they have to wait for the merchandise to sell. It could be fast or slow.
For small companies that sell higher-ticket items say to the government, the turnaround on an invoice is slow. It has been known to put companies out of business.
Small Business Factoring Can Help
What small businesses can do about this situation is take their accounts receivable or invoices and sell them. The buyer is called a factor. The factoring company pays out the majority of the amount from the invoice to the small business.
Payouts Are Dependent On Commercial Creditworthiness
The payouts given to the business retailer is usually in the ballpark of 70 to 90 percent, dependent upon the company’s creditworthiness.
The rest of the amount is paid up once the invoice gets paid. The factor takes a factoring fee, which is basically a transaction fee.
Even if a company is a newcomer who has just opened its doors, or hung its shingle on a web domain, they are not out of the factoring game. New businesses have a clean credit history and may be given a great opportunity to participate.
This can be a great boon for businesses that need to place orders while payments are just starting to trickle into its coffers. The difference between the decision of a factor and a bank is the flipside of the same coin. Though one side of the coin pays off and the other side of the coin causes headaches.
Banks see a new business as a risk to its lending, and they may not extend a loan. In particular, if a bank does issue a loan, it might be at a very high-interest rate. The factor sees the clean credit history almost exclusively when making its decision to hand over money. They are more interested in knowing that there is an invoice.
Factoring companies remit the money fast. Compared to waiting for a couple of months for a normal client to pay, the factoring outfit will have the cash in the business’s hands within two days usually.
The fees are usually a bit higher than the bank. Though, there is no long-term commitment for the small business to continue enlisting the factor. That means that the lending actually costs less than a loan.
While it might seem a way around the stricter underwriting of a business loan from a bank, that is not exactly the case. Factoring has become much more popular and is very profitable. Factors usually stay within the confines of one industry in which they specialize.
Multiple Invoices Might Be Less Lucrative
Now, for companies whose business results in many smaller amount invoices, the service fees might make factoring less attractive. After all, the invoice is still a risk for the factor. A small denomination invoice may not be worth its time.
What About Collections?
Small business owners have a lot more to worry about than collecting on outstanding invoices. The great part is that for the small fee paid out of the invoice, the factoring firm handles the collection of the money too. It is a win-win. It is definitely not something that the bank is interested in doing unless they want to call and hassle about an unpaid loan.
For companies that are going to make the big leap overseas, factors often already have relationships in other nations. This makes doing business within the cultural confines of other nations easier and more lucrative in the long run too.
Small business factoring provides many value-added services about which most companies may not know. Take the time to explore popular but less well-known services such as factoring to keep your business afloat while collecting on late invoice payments.