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Blog #10 Who Should Factor?

A lot of business owners already factor and they don’t even know it.  Every time they accept a credit payment or any time they offer an early pay discount to a customer they are actually factoring.  Some of them would be very happy to have all their customers pay within discount terms all the time; those are the businesses who should be factoring.

Entrepreneurs often fail to consider that many of their customers will expect to have open account terms and be allowed to pay in 30, 60 or even 90 days.  This has resulted in a lot of unnecessary business failures and many good business people have lost control of their business because they were not prepared.  Every new business owner needs to understand their working capital needs and figure out if factoring is an option so they can build it into their business plan.

Rapid growth is another common cause of business failure.  Cash flow problems put a strain on many parts of a business and unless it’s solved, these problems can spiral out of control.  This can result in lost sleep and focus resulting in rushed decisions that are more likely to be bad ones. Factoring solves cash flow problems and can provide working capital at the same pace as sales grow.

Sometimes it’s tempting for business owners to withhold taxes or slow down supplier payments because it’s easy and they think it’s inexpensive, but it’s seldom a good idea.  The interest may appear to be low, but the long term negative effects can end up being very expensive.  If a business is currently behind on important payables like taxes then it’s time to look into factoring quickly while it is still an option.

Bad things happen to good businesses, as I think we shall soon find out.  When the financial condition of a business deteriorates it worries lenders, especially cash flow lenders. In some cases it will be hard to tell whether the problem was occurring prior to the pandemic or if there will be new problems arising after the pandemic.  Either way, if good businesses are to succeed and turn themselves around they will need the kind of support that Factoring provides.

All small and mid-sized operating businesses who manufacturer something, distribute things or provide services to other businesses are forced to deal with open account terms. Business finance professionals like us need to recognize the situations where factoring might help and then provide information so the business owner can make an educated decision.  We should not allow a business to fail because they weren’t aware of a good option.

The business world is different today than several months ago with even more uncertainty.  What business owners are going to need is access to working capital and a flexible form of ongoing financing.  The factoring process is very much the same today as it has been for hundreds of years and in many cases the perfect solution for the right business at the right time.

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