So now we know how invoice factoring works and why businesses choose to use it, let’s talk about the advantages factoring receivables has for small- to medium-sized businesses over other options that are out there.
How Businesses Used to Get Money: Term Loans
First and foremost, let’s talk about the financial option people most commonly think of when the subject of obtaining money for your business comes up, and that of course is the bank. Up until 2008, prior to the financial collapse, businesses that needed money would go to their local bank, sit down with a banker and apply for Small Business Loans.
The banker would then run a credit check on the business, look at its financial statements, assess its working capital, cash flow and the overall health and more before making a decision to offer long term loans. If a business met these criteria, had a solid business plan, and had collateral to put down for the loan, the bank might award the business loan – this would take a little while – and the business owner would sign it on the dotted line. Generally the business loan would involve paying back that money in agreed upon amounts over a set period of time.
How Businesses Today Get Money: Invoice Factoring
Yet today, getting small business loans the old-fashioned way is getting more and more impossible, even for businesses in the black with solid credit and financials. The criteria for meeting these small business loans keeps getting longer and longer; it is a fact that banks today are flat out lending less. Moreover, banks are taking weeks to process these lengthy applications and many companies are finding they don’t have the time to sit around and wait. Those who do get loans are getting less than they asked for and more restrictive terms.
So let’s get back to the original point, what are the advantages of invoice factoring. And the short answer is expediency and accessibility.
Time Is Money, and Those in Factoring Services Get This
With Account Receivables Factoring, applicants can get the money they are seeking in a matter of days. And in most cases, the applicant will know the same day whether or not they qualify. The entire model of invoice factoring involves speed. This, of course, appeals to many businesses.
After all, why sit around and wait for your money when you don’t have to. Sitting around waiting to get paid costs you money. Doing nothing by not taking advantage of a potentially lucrative business opportunity will cost you money. And the people behind invoice factoring know and understand this as well as anybody.
Invoice Factoring Helps Because Money You Can’t Get Helps No One
Along the lines of speed, a key advantage to Factoring Receivables is that it is within reach of most business owners. Are you a legitimate business (and filed the proper paperwork proving that you are)? Do you have current customers and do those customers have a history of paying their bills? If you answered yes to both of those questions, you are likely a candidate for invoice factoring. (Some industries, however, such as those in consignments can’t use factoring services.) You do not need to have a high credit score, put down collateral (other than your invoices), or have been in business for a certain number of years to qualify.
Less Obvious But Still Important Advantages to Invoice Factoring Include:
- Invoice Factoring Lets You Do What You Want With Your Money
A traditional small business loan will require you to present a business plan and clearly set out the reasons you need the loan. Your rationale will be used at least in part to decide whether or not you are awarded the loan. With Factoring Accounts Receivables, you may be asked about why you need the money but this won’t be a major consideration in securing it. If you change your mind later and use the money for something else, you won’t be penalized for it.
- Factoring Receivables Offers Flexible Terms
Small business loans tend to be static offering one term for a certain amount of time. But invoice factoring, you can choose to factor several invoices one month and then factor only one the next. For this reason, invoice factoring appeals to those with seasonal business cycles such as freight and manufacturing.
- Factoring Services are Business-Friendly
This will vary somewhat depending on the factoring company being used but overall, invoice factoring companies are friendly, helpful and knowledgeable. They understand that many first-time customers don’t know much about factoring and will take the time to explain it to you as well as the terms of the agreement. Factoring companies are aware that they are competing for your business so they put effort into the extras like providing solid customer service.