If you are a business owner and you’ve ever been in a cash crunch you know how stressful payday can be. Praying that customer pays in time to make payroll is no way to run a business. However there is a way to remove the uncertainty of when checks will come in, and stop stressing payday.

Factoring is a great way to get quick the cash your businesses needs. Factoring allows businesses to access the money owed to them in the form of a receivable. The money is already earned by the business, factoring simply allows you to use that money.

Factoring provides more control over your company’s cash flows as well. Some Factoring companies let  you to pick and choose which invoices to sell which gives the business owner the ability to control cash inflows, not just outflows. Any business owner that has stressed making payroll knows the value of having access to cash when it is needed. Factoring can provide timely money and the piece of mind that comes with it.

Away from making payroll, factoring can help your position with suppliers and customers. On the supplier end, factoring funds can be used to make payments on time as to not strain the relationship you have worked hard to maintain. It can also be used to take advantage of early payment discounts as to cut costs. On the customer end, factoring can be used to differentiate your offering by extending 30 day payment terms. Further it can be used to finance large deals or busy periods so that your business can fulfill all its deals and/or not have to turn down business due to lack of capital.

After long negotiations your business finally makes a huge sale. You look forward to building a relationship with this large client. However there is one catch; they want 30 day terms.

This could potentially be troublesome for the finances of your business. You have to cover the costs while completing the deal then 30 days after its finished. This has not been a problem in the past, but you’ve also never had such big deals in the past. A deal this big could cause a huge cash flow problem for your business. Also, you have never dealt with them before, what if they are not prompt on payment? You could miss payroll or be late paying your suppliers. But you don’t want to lose this deal. What do you do?

Well a great place to turn in this situation is to an accounts receivables factor. They can approve an applicant for funding in as short as 48 hours, and disburse funds upon invoicing. This means you can make the deal and not fret about the cash flow position the 30 days terms might put your business in.

Factoring is also a good tool to use when you are competing for a customer; offering flexible payment terms is a way to differentiate your offering and win more business. Factoring can enable your business to extend payment terms without creating a cash flow crunch.

Factoring also helps when taking on a new customer in that, factors will do a credit check on all of your debtors. This provides valuable information on your customer’s ability to pay for the orders they make. There is nothing worse then not getting paid for your sales; factoring can help prevent this situation from happening, allowing you to focus on your credit worthy customers.

Factoring can be a perfect way to finance business growth for a number of reasons. It can solve cash flow issues, the funding grows with your sales, the funding is flexible, it doesn’t add to your overhead, etc. However, a key benefit of factoring is that it lets you reinvest your earnings back into your business faster.

Without factoring, a business is forced to finance their customers purchase for 30 days or often times longer. This is all well and good, but a growing business usually won’t have the extra capital to be financing their customers and their expansion. Factoring allows these growing businesses to affectively stop extending trade credit, so that they can finance their growth rather than their customer’s purchases.

Factoring gets the businesses paid upon invoicing which can be huge for growing enterprises. It not only gets capital back in the business and covers the expenses of the deal but it provides cash that a business owner can depend on being there when they need it. This can provide safety for a growing business, and help relieve financial concerns that arise from not knowing when payment will actually come in. This provides the ability to expand rapidly and responsibly

As well the money from factoring can be invested in volume discounts and early payment discounts to affectively cut costs. This decreased in cost coupled with the ability to take on more business can lead to skyrocketing profits. All because you can reinvest in your business faster.

There are business forums all over the internet, full of people with good ideas that just need funding to get things moving. Most are hoping for an angel investor to provide them with the funding they need. This is one approach as Angel investors they can be utilized for all types of businesses; it is the “one-size-fits-all” financing method.  However angel investors are hard to come by and are not the only way to secure funding. There are many creative ways to fund businesses that are unique to a particular business model. Knowing what types of financing are available may help you receive the funding you are looking for.

Great break down of factoring. Informative, concise, and easy to understand. If you are not familiar with factoring, this is a great introduction.

Factoring tends to be widely misunderstood. It is not a ‘traditional’ lending arrangement and most businesses owners have limited exposure to factoring, if any at all. Because of this, there are many myths and misconceptions about factoring I hope to dispel here.

Myth #1

The most widely accepted myth is that factoring is too expensive. There is some truth to that statement; 2 to 6% over 30 days is a lot. However, there are many ways to offset this cost. Using the funds to complete deals that otherwise would have not been financially possible is the best use of factoring funds. In this case you are increasing your profits as a direct result of factoring. If your business is already at capacity and cannot take on new sales, it means your business needs to grow. Factoring is ideal for growing companies as it provides flexible financing that grows with your business. Factoring funds can be used to purchase new equipment, hire new employees or open a new location, all of which can increase your long term profits. Factoring can also allow you to take advantage of volume and/or early payment discounts which can affectively off set the factoring fees. Bottom line is when factoring funds can be put to good use, it is expensive not to factor.

Generally speaking, the biggest hurdle in financing a business is finding the money to get it started. The next big financial challenge for most businesses is finding an effective way to finance growth.

Growth can come in many different forms such as a new location, a bigger office, more equipment, more capacity, increased inventory, more staff, new products and/or services etc. Further, each business tends to be in a unique financial situation in terms of what different types of funding they can qualify for, which makes matching financing to growth requirements a complicated process.

Potential clients often think that because they have a collections agency, they don’t need Factoring. While this might be the case, it is important to note that factoring is a completely different process with different goals, different benefits and should be used for separate purposes.

The only similarity between the two services is that they function to help businesses receive payment on accounts receivables. However they achieve this end through completely different methods.

One benefit of factoring that is seldom mentioned is that factoring offers dependable money.

What I mean when I say “dependable money” is that factoring allows a business owner to know exactly when payment will come in.

Even with the most creditworthy, dependable customers, payment on a particular invoice typically has about a week of ‘wiggle room’ in actually receiving payment. It could come a few days early, it could come a few days late, and there is no way to know exactly when payment will come.  With customers that are less dependable, organized or prompt, this could turn into a few weeks or months of ‘wiggle room.’

Businesses should be prepared for this to some degree; it’s the nature of 30 day payment terms, but there are situations where the money needs to be there. Starting a new project, making payroll, loan payments, due taxes, rent, expanding business; the list goes on, but the point is that in all these situations the business needs to have the money in-hand and ready to go. This is easy when the business has plenty of cash but when money gets tight, fulfilling obligations can get stressful. Rather than hoping to get paid in time to meet payroll or rent, factoring can provide the assurance that money will be there when it is needed.

The Obama administration has come up with a new initiative to help small businesses. Details of this plan can be found here. The goal of this initiative is to increase access to capital through tax breaks on small businesses investments and lending incentives to smaller community banks which should lead to job creation. Here is a break down of the initiative.

To increase small businesses access to loans a $30 billion “Small Business Lending Fund” (SBLF) will be created. Access to this fund will be limited to banks with less then $1 billion in assets as to target smaller community banks that are a staple of small businesses lending. The funds will given to banks with a sliding scale interest rate that gets lower as small business lending is increased compared to previous years. For example, if a bank were to increase their small business lending 10% or more compared to 2009 numbers, the rate they would pay for the SBLF funds would be 1%; if small business lending stayed the level the rate would be 9%.