Can invoice factoring help your business as much as a bank loan?

We often hear about how hard it is for small business to get loans approved these days.  Banks simply are not providing loans to many of the companies that keep the USA economy moving forward.  If a small business is conducting business with other business's then invoice factoring can provide many of the benefits that a business loan can provide.  Often banks provide lines of credit that allow the business to borrow up to 80% of the accounts receivable in good standing allowing the business owner to have access to funds for payroll, supplies, and other operating expenses before the customer payments arrive.  This is very similar to how accounts receivable factoring works, expcept it's much easier to get approved for a factoring facility in todays credit crisis.

If your bank has declined your loan for working capital the next step should be to give invoice factoring a serious look.  Of course you need to offer terms to your customers to have accounts receivable so if you do not offer terms, then this finance tool will not provide a solution.  If you do offer sales terms and the customers have reasonable credit you should have very good chance to get approved for a factoring facility that will offer an advance of up to 90% of the invoiced total the day you generate the invoice.  Factoring companies are able to base the credit decision on your customers, not your balance sheet so your able to leverage your customers credit to obtain working capital.  It makes sense if you think about it since your providing credit to your customers in the first place.

You can then take a look at your business model and think about how your business could change if all your customers paid in one day.  The benefits, if any, will very greatly depending on how your company operates.  What value is getting 90% of the invoice the day you generate the invoice?  Can you take advantage of supplier discounts?  Can you add additional staff?  Can you grow the business easier by having your cash quicker?  Then you need to look at the cost of factoring.  Most factors charge 1% to 4% of the invoiced total which is very similar to a credit card fee.  Can you come out ahead after paying the factoring fee?

As you can see invoice factoring is a much easier way for a business to obtain working capital when compared to a traditional bank loan.  If the bank turns away your request for funding, then invoice factoring may offer similar benefits with a fast approval.  Most factoring deals can be approved in as little as 2 days.  Your cost of funds will be higher, but if you can offset the cost with benefits it can be a very powerful business funding tool.

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