There are times when red tape and bureaucracy are just too much to deal with along with everything else you need to do running a business, so you look for an alternative source of funding to a bank.
Of course there are credit unions and building societies but they still require assets as collateral. Factoring is a real option, which is quick and importantly, it is flexible.
Factoring is based on the value of your invoicing.
Some “factors” to consider when considering financing options–
Factoring also known as “cash flow lending” or “debtor finance” is not a loan, unlike a bank loan or overdraft you do not incur a debt, probably the most important consideration. So no repayment of principal and interest on a loan.
Receiving the required funds is usually within 48 hours, whereas getting approval for a loan and finally receiving funds from a bank will take considerably longer.
While your credit rating is important, it is the credit status of your debtors which is more important to the Factor (the company doing the cash flow lending). A bank will take into account your company’s financials, credit rating and history.
Factors can provide services such as regular collections reports and maintaining the history of payments from you customers and they can even make collection calls for overdue invoices, though this is not necessarily the best way to handle outstanding invoices as you the company, know your customers and their situation better than the Factor. A bank lender will not provide these services.
Flexibility occurs with the amount of money you have access to. As your invoicing grows, so does the potential for your cash flow. A loan from a bank is a set limit usually for the term of the loan, to increase the amount is virtually going through the loan process again.
While there is, of course, paperwork when using a Factor, it is less than when dealing with a bank.
With factoring the rates for payment are also flexible, again based on your receivables. Rates are fixed with a bank loan for the term of the loan.
Banks may not be so favourable towards SMEs which do have adequate assets but factoring is particularly suited to small and medium sized businesses, even with a modest annual turnover.
An article in the BRW highlighted the benefit of factoring when it described the experience of Distribution Central, a medium-sized IT distribution business. The company was able to get access to about $12?million a month in short-term financing to reinvest in and expand the business, without drawing on a bank loan.
Distribution Central was turning over about $100?million a year and agreeing on a facility of up to 80?per?cent of the company’s debtor’s ledger, the company was able to borrow more than $10?million a month.
The owner of Distribution Central said “The banks don’t want to touch you until you can show a profit history, retained earnings, that type of thing,” “It was perfect for us because our business in the early days was basically just a debtors and creditors list and not much else … We found we could ‘sell’ our debtor book and get a financing line we couldn’t otherwise get with the banks.”
There is also the idea of spreading your finance sources around, not having all your streams with the one institution. For instance if your trading account is not in good shape, a bank may be reluctant to enter into a loan or overdraft arrangement.
Factoring may also assist your company to get a bank loan in the long term, as it will establish a profit history for your company, something a bank will find attractive, as they say “beauty is in the eye of the beholder”!