Recently at a technology conference I was talking with small business owners about their financial backing. One of the challenges of being in the factoring industry is having to explain how a factor can help a company grow. Usually the process seems somewhat of a mystery, and once a little light is shed on the mechanics, the concept becomes more welcoming.
So what sort of businesses should take advantage of invoice factoring? For the most part, ones that are growing quickly. When the internal financial statements of a company cannot show historical revenues to support getting a loan from a bank, receivables factoring is a safe bet to access working capital. Because, in theory, a line of credit is supposed to be factoring done in house. To properly utilize a bank line of credit, money should be taken out of the account – but then replaced once income derived from borrowing has returned to the company. I’ve written before this takes discipline.
A typical candidate for factoring has just been awarded some new contracts, they are going to ramp up with new employees and also possibly some supplies which means staying on top of the accounts payables. By leveraging the invoices derived from finished and completed work, the company can grow quickly without the threat of performance lapse. Because the factoring account grows with the revenue, there’s no need to keep reapplying for a larger capital availability.
Once a small business owner takes a look at their growing accounts receivable aging report, the idea of taking those dollars off the aging and putting them into the bank account starts to become very attractive.