Closing The Small Business Financing Gap: Invoice Factoring Basics

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To manage the cash flow of your business, consider all your financing options, including using your receivables. In this second of two articles, we look at how traditional alternative financing options such as factoring help close the financing gap.

Even profitable businesses can have cash-flow issues. This is especially true in industries with long payment cycles, such as apparel, construction, food and beverage, government contracts, hospitals and nursing homes, importers and exporters, manufacturing, staffing, transportation and wholesale/distribution. “There is an,” said Marina Linhart, CEO at Next Street.

to get its money quickly rather than waiting for the customer to pay directly. It provides a flexible funding strategy. It’s not a loan because you don’t incur debt. It’s not equity because you don’t give up a piece of your company. However, invoice factoring can provide the financing your company needs.

“You’re not borrowing money from a factor and you don’t pay interest on the money,” said Rachel Hersh, Sales Director, North America, Prestige Capital Corporation, a factoring company. “Instead, you sell your invoices at a discount to get cash. The factor then owns the invoices and gets paid when it collects from your customers. The factor then owns the invoices and gets paid when it collects from your customers.

Factoring is particularly useful when your startup or small business doesn’t qualify for traditional financing, when you need to supplement an equity raise or when you need money faster than banks can deliver it. The application process is typically quicker and simpler than a bank’s. While factoring is more expensive than a bank loan, “the benefits of qualifying based on your customer’s credit worthiness, not yours, an easier application process and speed of receiving money can outweigh its costs,” said Hersh. It is important that you understand the costs and compare factoring to traditional loans. Your accountant can help you do an apples-to-apples comparison by calculating the equivalent APR based on the factor’s discount.

 

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