Borrow from the Bank?
When you need money for your business, where do you go? These days, a smart business owner gets online for information before running down to the closest bank. “small business loan,” “SBA loan,” “business financing.” That search will bring up a slew of banks, government agencies, consultants, middle-men, and fly-by-night quick cash operations.
A term that doesn’t usually come up in the business loan search is “invoice factoring.” Not many business owners have ever heard of factoring, even though it’s been around for over 4,000 years. If you haven’t heard of it, I’ll give you a brief run-down of the process.
- You send the factor your unpaid customer invoices.
- The factor advances up to 90% of the invoice value to you.
- The factor receives payment from your customer.
- The factor recovers the amount advanced to you plus their rate.
- The factor rebates the difference to you.
- You send the factor more invoices and the cycle continues.
Factoring companies were coming out of the woodwork during the recession when banks put a stop on the free-for-all lending practices of the past decade. In fact, even conservative lending was becoming pretty scarce and small businesses had nowhere to turn for working capital. Now that traditional credit financing is getting its come-back, the savvy business owner should still consider all options, including factoring.
Here’s a comparison of traditional bank financing to accounts receivable factoring.
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Bank
Loan
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Factoring
Accounts Receivable
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Minimum 3-5 Years in Business
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Start-Ups Welcome
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Required Documentation:
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Required Documentation:
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Business Plan
3 yrs. Financial Statements
(P/L, Bal. Sheet) 3 yrs. Business Tax Returns
3 yrs. Personal Tax Returns
Current Personal Financial Statement
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Current Financial Statement (P/L, Bal. Sheet)
Last Year Tax Return
Current A/R Aging Report
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Ratios Examined:
Liquidity (cash & working capital)
Leverage (debt on balance sheet)
Inventory (turnover determined)
Turnover (receivables, inventory, sales)
Receivables Turnover(A/R vs. sales)
Gross Profit Margin (Sales – COGS)
Return on Sales (% profit after expenses)
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No Ratios – Factoring is Designed to Grow Your Business into a Positive Cash Flow Position
Opportunity to Turn Your Money Faster
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Good Personal & Business Credit
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Poor Credit OK (Focus on your customer’s credit)
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Pledge Personal/Busi. Assets as Collateral
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First Position on B2B A/R Only
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State Use of Funds (Inventory, Equip, etc.)
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Use the Funds for Anything
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Approval Can Take Months
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Fast Approval (about 2 Business Days)
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Incurs Debt
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Debt-Free
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Monthly Payments
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No Monthly Payments
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Fixed Loan Amount or L.O.C.
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Flexible Line of Capital Grows With Business
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High Interest Rates
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Rates Starting at 1%
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Additional Services Provided:
Check Credit of New Customers
Statement Processing
A/R Management
Merchant Payment Services
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