Business Factoring Loan
A business factoring loan, also commonly referred to as ‘factoring’, is a unique type of financing that gives a business working capital in exchange for certain accounts receivable. This means that a business effectively sells certain invoices to a lender in exchange for upfront working capital. Lenders that issue business factoring loans are often referred to as ‘factors’. The idea is that it allows your business to receive upfront capital in exchange for sales it has already made. Many industries suffer from long business cycles which mean invoices may take considerable time to be paid — business factoring loans help alleviate the stress of a shortages in cash flow.
How is Factoring Different?
A business factoring loan is not a traditional small business loan. The factor is essentially purchasing the rights to a specific invoice, minus a predetermined discount. The factor will typically pay around 75% of the invoice to your company upfront, with an additional amount paid after the invoice is collected. On the other hand, traditional business loans lend you money on the condition that it is paid back with interest over a set period of time. Because of the associated risk for the lending company, a business factoring loan can end up costing a company more than a traditional loan with a low interest rate.
What’s the Process?
When factors determine to purchase an accounts receivable off of your business they will be more concerned with your customers financial information than yours. This is because they are essentially taking on the responsibility of collecting the invoice. For this reason, the factor will want to analyze the financial details of your clients before making any decisions to purchase their invoices. Most factoring companies can get you capital within a day of applying, this is especially beneficial considering that some of your clients may take months to pay their invoices in total. One benefit of factoring is that due to the fact it is not a loan, you technically don’t take on any debt for the capital received.
Are There Other Options?
There are many options available to small businesses seeking additional working capital. But factoring is often considered a short-term solution for what may be a long-term problem. Forfeiting part of your revenue is not an advisable long-term strategy. You may want to consider one of the other various business loans available to you as a small business owner. We offer lines of credit that offer our clients ongoing access to working capital that can help alleviate the stress of overdue invoices. In addition, you don’t have to reapply for access to cash; a line of credit can continually be drawn out of as long as you don’t exceed the limit. Lines of credit allow you an increased amount of flexibility that many other types of financing don’t offer — including business factoring loans. Don’t wait for an invoice to be late or an unexpected event to occur, apply for a line of credit through our online portal today!