A lot of people are talking about factoring these days. But if the Internet has taught us anything, it’s that a lot of people don’t know what they’re talking about.
Factoring is often confused with accounts receivable financing, a loan secured by customer invoices – with all of the closing costs and paperwork that implies. With a loan, you pay the money back, plus interest.
A factor pays you – advancing up to 100 percent of the invoice value, upfront – and collects from your customer on the invoice due date.
Factoring differs from a bank loan in three main ways:
- The emphasis is on your customer’s ability to pay the invoice, not your credit.
- Factoring allows you to get paid today for work you’ve already performed, whereas a loan comes with the burden of repayment.
- Getting a loan takes time and may include restrictions or requirements that restrain your business. Factoring is a simple transaction-based arrangement, which means money in your bank when you need it.
As a business, you need to cultivate strong banking relationships. Access to credit is a sign of a healthy enterprise. But because banks are insured by the Federal Deposit Insurance Corp., they have fairly firm guidelines for lending they are required to follow, and you may have cash needs that don’t meet those criteria. When banks have to say no, a factor often can say yes. It’s a symbiotic relationship, and one that works well for small businesses, which live and die by cash flow.
That’s especially true for start-ups, which tend to grow fast and need cash more urgently than a long-established business.
And because factoring is not a loan, it doesn’t load your balance sheet up with burdensome debt.
The truth is out there . . . and so are we.