Small Business Factoring and its companion, Asset Based Lending, will be all the rage in the coming months and years as companies seek working capital to sustain revenue growth. Our news outlets continually report on the stimulus plan, tax credits, and other initiatives to incubate the economy; however, the fact is that the banks are not lending. This is most evident when reviewing the latest reports produced by the SBA, which show that its two most popular programs, the 7(a) and the 504, decreased last year by an average of 40%.

The future of small business factoring is here, and again it will prove to be the best stopgap solution to combat sour banking and credit markets. The proven practice of factoring will promote top line revenue growth when traditional bank financing does not fit, or in current market conditions is often unavailable.

What is invoice factoring? Invoice Factoring is the sale of a company’s invoices and/or accounts receivable at a discount in exchange for immediate cash. Unlike a traditional bank that will take accounts receivable, inventory and other assets as collateral to lend, an accounts receivable factoring company will purchase invoices directly. For the business owner with little working capital, the end result is the same, however, from the outside, there are some clear advantages and disadvantages to both invoice factoring and traditional bank financing.

Invoice Factoring – Pros and Cons

Benefits

• Factors will pay immediately on approved invoices.
• Business owners do not incur debt to pay. Selling invoices for cash is the same as offering customers a discount for paying early. You’re trading a quick pay discount for the convenience of having cash now.
• Factoring companies will foster growth by providing additional working capital to grow. Unlike a traditional bank that will require a business to reapply for each loan increase.
• Flexibility, as a business owner or management team, it is your choice to factor specific invoices or not.

cons

• When compared solely on cost. Factoring is a more expensive form of working capital.

Small business factoring has been and always will be a stepping stone or bridge to traditional bank financing. Through fast-growing invoice factoring and asset-based lending are alternative periods proven to improve cash flow and return on capital. What defines rapid growth? In the life cycle of every business there are periods when a company’s growth rate exceeds its earnings.

When working with a traditional bank, profit is a key component to any financing deal. Unbalance the ratio and your bank will restrict or, worse yet, revoke your lending privileges. Banks focus on the net value of the assets committed to repay the loan and assign ratios that must be met. Factoring companies and asset-based lenders are funded solely by cash flow and the strength of a company’s customer base.

In light of the current economic uncertainty, many factoring companies have re-emerged as a preferred and viable financing alternative. Factoring will once again provide businesses with much-needed working capital to grow and serve as a desirable solution to the cash gap. It remains to be seen how long it will take traditional funding sources to loosen the strings of the portfolio; Until then, however, accounts receivable factoring and asset-based lending will provide business owners with financing to support growth.

In short, no one really knows how long it will be before traditional banks lend again, but in the meantime, trade needs to keep going.