For years, many entrepreneurs used home equity lines of credit to fund their business growth. After the housing crisis, however, banks were more reluctant to provide these home equity loans. Also, your home may have lost value and you no longer have equity to offer as collateral on a loan. Some entrepreneurs solved this problem by turning to factoring as replacement financing. If you are in this predicament, factoring can work for you as well.
Even with the economy stabilizing, most banks still have stricter credit requirements, particularly for entrepreneurs in the early stages of growth. Business loans are not really an option for many entrepreneurs since banks look at traditional metrics, such as cash flow and debt ratios. When you are starting out those are not always the best indicators of financial health. Factoring companies can offer entrepreneurs financing because they analyze other metrics and use your company’s accounts receivables as collateral. Factors provide an upfront advance of 70 to 90 percent of receivables. After collecting your payments for you, the factor transfers 97 to 99 percent of the collected amount back to you. Although there are different types of factoring arrangements, some factors even provide credit protection for your growing company by taking the hit if the invoiced company does not pay or goes out of business.
During the recent financial crisis, your business may have struggled. Due to these difficulties, your relationship with your bank was damaged. Now, you need time to shore up your financials and gain back your credit standing. Even though your business is doing better now, you still need financing to bridge the gap between now and the one to three years it takes to re-establish credit. Factoring is a financing method you can use until you qualify for traditional bank loans again. Some factoring companies may require a minimum commitment period or a guaranteed monthly fee, but others do not. Make sure you understand the commitment you are making upfront.
Fast-Growing Companies That Want to Increase Profits
Even though the lending environment is tougher than it used to be, some of you can still get financing from a traditional bank. So why use factoring when it is typically more expensive than a bank loan? You may be in a situation where more capital could help you generate more sales and profits. If your growing company can only get enough money from the bank to do $5 million in sales that generate $500,000 in profits, you’re leaving money on the table. What if you could borrow enough cash to bring in $20 million in sales and $2 million in profits? Even though you spend an additional $300,000 in financing costs, you would still realize an extra profit of $1.2 million dollars. ($1.5 million profit from the additional sales, less a 2% factoring fee.)
You can benefit from accounts receivable factoring if you are in any of these situations. For more details, contact us and we can advise you on how to best set up your factoring finance.