Invoice factoring is an excellent choice for businesses in many different industries who are looking to solve cash flow challenges. By factoring your invoices, you will have access to cash that would have otherwise remained untouched until the invoice was paid which could take 30, 60, or even 90 days. However, if you are a new business or a company who is still working on building credit, is invoice factoring a feasible option?
For a new business or a company who is building their credit, it can often be difficult to obtain a loan or other forms of funding. Banks and other financial institutions often aren’t willing to look at new businesses due to their lack of history and assets, even if the business has good credit.
However, factoring has different criteria for acceptance than a traditional bank loan or line of credit, which makes it a good choice for not only established businesses, but also ones that are just starting out.
Who Can Benefit From Factoring?
Any business that supplies goods or services to other businesses and grants credit terms to those customers can benefit from factoring. Factoring will convert those invoices that may take 30 to 60 days to pay into immediate cash.
This is especially beneficial to younger businesses because by converting the open invoices into cash, the business is now recovering its operational expense immediately and allowing a faster pace of growth.
Why is Factoring Good for New Businesses?
New businesses have a much more difficult time getting financing from banks and other lending institutions because they lack track a record and their equity position is low. If they are able to arrange anything at all, it usually will not be enough to be useful.
Factoring will give them immediate access to the cash tied up in their accounts receivable and it will usually amount to much more money than they can get from a bank or other lending institutions.
By constantly liquidating their accounts receivable as they are created, young businesses are able to pay both their suppliers and their employees on time, which gives them the appearance of an older more established business.
Factoring also provides services that can replace the need for an employee working in the credit and collection department which is particularly valuable to younger companies.
Not only do factoring companies run credit, background, and other checks on the company’s customers, they also perform administrative duties that would be typically performed by a credit and collection department. This can include collections on accounts receivable, calling the company’s customer to ask for payment, processing invoices, and making sure all other documentation is in order.
Separately, all these duties would be performed at the cost of a full-time employee. This would not include the expense of running all credit and other checks on customers, which can be costly. All of this is included in the fee a company pays their factoring company, so you are not only saving money but also gaining additional security.
How Should a New Business Choose the Right Factoring Company?
Choosing the correct factoring company is important to any business, but it is especially important for new businesses. Although factoring companies do have different criteria than banks or other financial institutions which makes them better for new businesses, there are still some factoring companies who may not accept newer businesses.
Some reasons for this include non-established credit, a smaller amount of customers, or only having one account to factor. Because of this, a new business must perform solid research to find a factoring company who will be willing to work with a newer or less established business.
UC Factors has historically been friendlier to new companies when it comes to qualifying for invoice factoring. Many other companies in the industry will not entertain qualifying a factoring prospect without at least one or two years in business.
This is because they are qualifying prospects on a financial or a credit basis and new companies simply do not measure up. A company like UC Factors will pay more attention to performance and less to their credit.
We would only have a problem on a credit basis if the prospect has an existing bankruptcy or tax lien. Other than that, we look to the performance of the prospect and the credit of their customers.
When searching for a factoring company, a company always should be sure to ask the correct questions to make sure that the factor will be the right fit for their business, but especially if they they are a new business.
Who Would Not Benefit from Factoring?
Companies that don’t have the ability to expand or somehow make back more money than they are paying for the service of factoring should not factor. Factoring should be viewed as a tool that creates opportunity to make more profit. Not every company is in the circumstances where this would be true.
Here are some examples of companies that could not qualify or would not benefit from factoring:
- Retail companies generally do not qualify for factoring for two reasons. First, they usually are getting paid at point of delivery of product or completion of service. Second, even if they do grant credit, factoring companies don’t accept receivables due from individuals.
- Companies that do not get proof of completion or proof of delivery to back up their invoices usually will not qualify for factoring. Factoring companies and/or the financiers of factoring companies need this proof to validate the invoices that are factored.
- Companies that are paid by credit card usually don’t need factoring but if they did most factors would be unwilling. The cost and administration of a credit card account makes this unfeasible.
- Companies that don’t have stated terms within the framework of normal commercial credit terms, and this means 30-60 days, usually will not benefit from factoring. Factors need terms in order to assess credit and conduct collection procedures.
Factoring can be an extremely beneficial option for many companies in many industries, but especially for new businesses. Factoring will give new businesses who may not have the opportunity to get a bank loan or line of credit an option to solve cash flow challenges and encourage business growth.
Working with a factor can not only save a new business time, but also cost less in the long run due to the additional services that comes with invoice factoring such as credit checks and accounts receivable administrative work.
If you are a new business interested in invoice factoring, we encourage you to take the time to perform research to find the right factoring company to fit your business.
Would you like to learn more about choosing the right factoring company to fit your business? Download our free PDF guide on how to choose the right factoring company here: