Factoring As An Alternative To A Business Loan

Loan lending business
Loan lending business

There are many interesting opportunities that are available for companies that cannot get a business loan. The truth is that not all business managers need a loan and there are so many interesting options that are available when you need more money. As an example, you can work with a company that is specialized in offering increased monetizing options. You can click the link for more information on Today’s Growth Consultant as an example of such a firm.

What Is Factoring?

Factoring is also known as accounts receivable financing. We can define it as a transaction that sees a business selling receivable accounts like invoices to another firm. The Factor (the third party) normally pays around 80% of receivable value as an up-front fee. For instance, if you sell a $1,000 invoice, you would receive $800. Factors will then collect payments from clients as the invoice is due, deduct fees (around 5%) and then forward the rest to you.

Factoring Advantages

The great thing about this option is that you gain immediate access to money. That happens before invoice date so you receive funds really fast. It is important for business growth because of the fact that cash flow is almost always a necessity.

You do not need to have a perfect credit score in the event that you want to use factoring. The factors are normally interested in how creditworthy the customers are. They do not really care about you as a business owner and how creditworthy you are.

Factoring Disadvantages

It is obvious that factoring is so much easier than the bank loan but it is not an option that is perfect. For starters, you do need to have a good profit margin that is built into what is sold, of around 25% in order to offer factoring approval. At the same time, you do lose a part of the value of the invoice. However, the same thing happens when you get a loan since you have to pay interests.

Who Is Factoring For?

Factoring is something that is really good for a company in the event that a lot of cash is blocked in some accounts receivable. Distributors, resellers, drop shipping companies and wholesalers do fall right inside this category.

As a really good example, factoring is an awesome opportunity for a small clothing manufacturer or any other specialty manufacturer. In the entire import industry the financing option is really popular.

Conclusions

There are so many companies out there that can be used as factoring options. You have to compare a minimum of 3 and then review quotes so that you can choose what is suitable for your business. Research is always the most important thing at the end of the day.