Factoring Financing

Most sales to commercial clients usually carry 30 to 60 day payment terms. This means that as a supplier, you must deliver your products or services now. However, your client has between 30 to 60 days to pay you.

This creates a significant challenge for owners of small and midsize businesses. The problem is simple. Your clients want to pay you in 30 to 60 days, but you must pay rent, payroll and your suppliers now. As you can see, the math does not work. Unless you have a substantial bank account, this leads to an almost impossible situation.

If you are in this situation, it is also very likely that the bank will not be able to help you. As you well know, banks only lend to businesses that have three years of profitable operations and significant hard collateral. If you do not qualify for bank financing, your best bet may be to consider factoring.

Factoring is a business financing tool that helps business owners who cannot afford to wait 30 to 60 days to get paid by their commercial customers. Factoring provides you with the necessary funds to meet payroll, make rent and pay your suppliers on time.



As opposed to bank financing, factoring is easy to qualify for. The main requirements are that you have a profitable business with a strong roster of commercial clients. For the factoring company, your best collateral is the invoices from your strong customers.

Factoring is also easy to use. It enables you receive a substantial portion of your billings within a day of invoicing. It reduces the time you wait to get paid from 60 days to 2 days. The transaction is usually structured as a two installment sale of an invoice. The first installment, called the advance, is paid to you immediately. The advance can be anywhere between 70% and 90% of the gross value of the invoice. The remaining portion (10% - 30%) is held as a reserve to cover disputes and charge backs. The reserve is rebated as soon as the invoice is paid in full. The factoring company will charge a small fee for this service.

Factoring financing is an ideal tool for companies that are growing and that cannot afford to wait to get paid by the clients. It helps you to stabilize your financial situation and positions you for growth.

Loan Financing Alternatives

Applying for a small business loan can be a frustrating process for a business owner. Most institutions have grown a bit wary of small businesses and require extensive paperwork before making a business loan. For example, most will require 3 years worth of audited financial reports showing a profit, extensive applications and background searches and substantial collateral. From a banks perspective, collateral is a synonym for machinery or real estate.

However, few small businesses have hard assets as collateral. What they do have is growing orders from quality customers. And for many, these growing orders are the source of the problem. Why, because commercial and government clients always pay their invoices in 30 to 60 days.

Waiting 30 to 60 days to get paid can be a challenge for growing businesses because few can afford to wait. Few have the working capital to pay suppliers, employees and rent while waiting to get paid. At the same time, they know their invoices are almost as good as cash. Almost as good, but not quite.



But what if your clients paid their invoices in a couple of days? Would that strengthen your business and allow you to take on more customers? Would you still worry about having to pay employees and suppliers? You can achieve that using invoice factoring.

Invoice factoring is a little known business financing tool that has been gaining considerable traction in the USA and in Canada. Basically, a finance company (called a factoring company) advances you funds using your invoices as collateral. This provides your company with the working capital it needs to pay employees, suppliers and cover growing orders.

Factoring has a number of advantages over more conventional business financing options. First, factoring is easier to obtain that conventional financing. The biggest requirements are that your business be free of problems and have good clients. But the biggest advantage comes from its flexibility - the size of your financing is determined by your sales volume to credit worthy clients. This means that your financing grows dynamically with your business.

Although accounts receivable factoring is a flexible alternative, it's not well suited for every business. For example, invoice factoring is not a good solution for companies that need funds to buy real estate or plant equipment. However, factoring is very well suited for companies that need working capital to cover operating expenses.