Understanding Commercial Factoring
One of the major problems inhibiting the growth and success of new businesses is the lack of
adequate financing. In order to stay afloat and continue to expand, there has to be a steady
stream of funding to work from, and for a new business, it can be difficult for your cash flow to
keep up with your costs, especially when the sale to collection delay can be anywhere from
30 days to three months. Commercial factoring can help you eliminate this delay and get cash
when you really need it.
In a commercial factoring transaction, a company (the factor) purchases your accounts
receivable at a discounted price. The factor will pay you immediately, and the debtor now owes
the balance to the factor. Essentially, for a small price you can use your assets immediately
instead of having to wait for the debtor which can take months.
What are the advantages of using commercial factoring?
The obvious advantage is the immediacy. Instead of collecting the money on your own, you
receive payment almost instantly – only the time required for shipment, delivery and invoicing,
which can be less than 24 hours. New businesses without a heavy cash reserve often don’t
have the cash reserve or luxury of being able to wait, so factoring eliminates the delay.
Another advantage is that factoring is not a loan. Your business’ credit will not be considered
in a factoring transaction. You are selling an invoice directly to the factor, so the only credit in
question is that of the debtor. In fact, since the factor will do a full credit analysis of the debtor,
you are entitled to use that information in your future dealings with that client.
Plus, since you are outsourcing all the commercial receivable management, you can focus your
time, energy and funds on other tasks.
What kinds of businesses can benefit from commercial factoring?
New businesses often don’t have the funds or the reputation to have good enough credit for
traditional lending options, so factoring is particularly appropriate for them because it is not a
loan. Your business may qualify for commercial factoring even if you have a tax lien or have
declared bankruptcy. Since new businesses often struggle with adequate funding, timely cash
flow, and bad credit, commercial factoring can eliminate all of these worries.
Another reason commercial factoring is particularly lucrative for new businesses it outsources
your accounts receivable and invoicing. Factoring relationships are generally long and steady
– not just one transaction. Finding a well seasoned factor at a reasonable price that will take
proper care with your invoices will be good for your business’ reputation while letting you focus
on expanding your new brand.
When is the best time to use commercial factoring?
Many companies do not know about the advantages of commercial factoring. Generally, when
a company starts using factoring they continue to use it frequently, having established a good
relationship with their factor. Commercial factoring is going to be most lucrative and useful
when your company is just getting on its feet, since it allows you to circumvent credit issues
and payment delays. Check out the WSJ’s How to Use Factoring for Cash Flow
factoring guide to see if factoring is right for your business.