Obtaining capital or credit for your developing small business can be a stressful undertaking if you opt to go the traditional, corporate bank route. Many established financial institutions, including even neighborhood banks and credit unions, have strict and inflexible requirements for small business lending. Those that do not have a high credit score and a solid history of revenue growth and profitability can have a difficult time obtaining new business capital even if they have strong business plan and leadership experience.
How can a budding small business blossom and thrive when conventional financial institutions are unwilling to lend them the capital they need to do so? The old adage, that a bank is most likely to lend to a business that needs it the least, generally holds true.
Rather than relying on the number of years your business has been established or your FICO score, accounts receivable financing companies provide capital or credit to small firms based on their clients’ credit, not theirs. So if your small business has current invoices issued to credit-worthy clients (called the debtor in small business factoring terms), it is likely that your business qualifies for small business invoice factoring.
Factoring as an Alternative to Traditional Financing
With factoring for small business, you are simply collecting on the money that is already owed to you in 2-3 days rather than 30 or more days. (You pay a fee to the small business factoring company for the expedited processing.) Small business invoice factoring offers the following advantages:
- Improved cash flow so you can pay your suppliers on time, move on opportunities as they present themselves, and purchase new equipment and supplies and more.
- Solidified working capital so you can ensure payroll obligations are met, rent and overhead are covered, and all other business essentials are taken care of.
- Untethered capital so you can grow your company as you see fit whether that is to move into new territories, develop a new product, or test a new market.
With small business factoring, you can take care of your primary expenses and get that out of the way so that you can focus on actually driving business revenue. It is difficult to expand your business if you have poor cash flow and liquidity and therefore struggle to cover operating expenses. Many small business owners underestimate the impact of slow invoice payment from clients. It is common for businesses to focus heavily on generating sales and overlook collecting sales payment. Unfortunately slow invoice payment can wreak havoc on many small business owners interrupting growth and even business stability.
Small Business Factoring Helps with Unequal Payment Terms
In addition to struggling to qualify for conventional business loans, many small businesses grapple with mismatched payment terms from vendors and clients. This can cause many problems with cash flow and liquidity, which can prevent business growth and expansion. For instance, if you are a small business in manufacturing, your supplier or provider of raw materials typically demands payment in 7-10 days.
Yet your client, who may be a large distributor, wholesaler or merchant, doesn’t remit payment for your finished goods until 30 or more days. Although this payment mismatch occurs in many different small business settings, it is a situation many enterprises aren’t prepared to properly handle. Both with vendors and clients, negotiating payment terms can be a challenge. Though it may be worth it to try obtaining lengthier payment terms from vendors and shorter payment terms from clients, it is a difficult undertaking. Small business factoring companies routinely work with those that have unequal payment terms to resolve this issue.
If you are a small business and rely on clients that are very large corporations or government entities, you are likely to have an even more difficult time negotiating more timely payments. It is common for many large corporations to leverage their value and position over you, the small enterprise. They know you rely on them and their business and as such, they aren’t likely to accommodate your requests for faster bill remittance. An accounts receivable financing company with a focus on small business can help provide you with some leverage and support in collecting invoice payment.
Entrepreneurs Can Stabilize Cash Flow With Factoring
By partnering with an invoice factoring company, you can eliminate this payment mismatch and put yourself in control of your own financials. By adding a layer of predictability and planning to your incoming payments, you can regain control of your financials, stabilize cash flow, support working capital and get into a nice rhythm regarding incoming and outgoing funds.
Many veteran factors are familiar with this inherent payment mismatch and can work with you to provide fast, on-your-schedule payment timelines. If you are a small firm just starting out, a mid-size firm seeking to expand, or a small business with large but slow-paying clients, small business invoice factoring companies can help your business move ahead.