It was a good question before the pandemic and an even better one today. Credit is tighter; many small business lenders are out of business and what money is available is only there for the bigger and better businesses. Start-ups, rapid growth, and turnaround businesses who need a quick solution will find that Factoring is their best option.
Business finance professionals like us need to help business owners understand why they should consider factoring. We need to show them that factoring is affordable and profitable, and the services provided can be just as valuable. Whether a business chooses to Factor or not, the exercise of looking into it is a healthy one.
Few entrepreneurs know everything they need to know as they start and grow their business but managing credit and collections is a very unlikely skill they have. The typical business owners look for any excuse to NOT deal with collections and only pay attention when there is a cash flow problem. Nobody pays more attention to an outstanding invoice than a Factor.
Rapid growth can be an extremely challenging time for business owners unless they have access to unlimited amounts of working capital, which very few do. Sales turn into accounts receivable, which puts pressure on accounts payable, and then items like payroll taxes and rent might get missed. Overdraft fees, late fees and other penalties, and eventually a lower credit rating can be a costly result.
Supplier credit is the business owner’s single best source of working capital; no interest, no collateral or dilution of equity and it can grow along with sales. Suppliers can also be encouraged to pay some of the Factoring fees by being encouraged to offer early pay or volume discounts. Factoring ensures that suppliers are paid on time and that is the only way to treat a non-equity partner who succeeds when you succeed.
Factoring may not make sense for every business, but in the near future it’s an option that many will need to explore. As we all work through this pandemic and the recovery starts, factoring could be the difference between success or failure for many businesses. So if someone asks you why they should factor, you can always share this blog and tell them that it’s their Bridge to Bankability.