Why Factoring Is Better Than a Bank Line of Credit

By Kevin Miller

Full article from Small Business Funding here.

Factoring Ranks As The Easiest Way To Get Cash For Business

Business has become increasingly complex because of COVID-19 closures, slow payments for accounts receivable, and reduced traffic for brick-and-mortar stores. That’s why it’s important to learn why factoring is better than a bank line of credit.

How Factoring Works

Every business owner ends up with cash flow problems for various reasons such as business downturns, difficulties in collecting accounts receivable, illness of key staff members, and more. Some owners turn to bank loans or lines of credit. However, you can get a better deal by selling your accounts receivable invoices to get the cash you need.

This type of financial transaction is called factoring, and many businesses use it regularly. You simply sell your accounts receivable, and you can avoid bank loans and the complex application process. You stay free of debt, maintain your good credit, and avoid lots of bureaucratic red tape. The following steps describe how the factoring process works:

• Set up a factoring account with our company, Small Business Funding.

• Invoices that you issue on customer accounts for 30 to 90 days qualify as potential invoices to sell.

• Determine which accounts receivable you want to sell.

• We’ll do some credit checking on your debtors to determine if they’re creditworthy.

• We’ll offer to buy the acceptable invoices with a high down payment of the total of acceptable invoices.

• Typically, we deduct about 10% to 20% from the cash advance to provide extra funds to cover nonpayment of some invoices.

• These funds are deposited into reserve accounts until the final calculations are made.

You’ll receive any additional funds after the reconciliation process. After all the invoices are collected, the factoring fee is deducted from the reserve account.

You can extend your financial prospects by selling the invoices of customers that have a history of paying their invoices slowly. You can keep any invoices of companies that pay their invoices quickly, too. Our advance payment rates vary by industry. Riskier industries like construction and medical products might receive a down payment rate between 60% and 80% of invoice totals. Companies in reliable industries might receive between 80% and 90% of their invoice totals.