It was a good question before the pandemic and an even better one now. Credit is tighter; most FinTech lenders are out of business and what money is available is only there for the bigger and better businesses. Start-ups, rapid growth and turnaround businesses who need a quick solution will find that factoring is their best option.
Business finance professionals like us need to help business owners understand why they should consider factoring. We need to show them that factoring is affordable and profitable along with some intangible benefits as well. Whether a business chooses to factor or not, even the exercise of looking at what it could do for them is a healthy one.
Few entrepreneurs are prepared for everything they need to know as they start and then grow their business. Credit and collections are probably not something they have much experience in. Business owners find any excuse to not manage their receivables and only pay attention when there is a cash flow problem. Nobody pays more attention to an outstanding invoice than a factor.
Rapid growth situations are extremely challenging unless the owner has access to unlimited amounts of working capital. Sales turn into accounts receivable, and that puts pressure on the accounts payable, and then payments like payroll, taxes and rent start getting missed. Overdraft fees, late fees, penalties and a lower credit rating can be costly.
Supplier credit is the business owner’s best source of working capital; there is no interest, collateral or equity required and it grows with sales. Suppliers will even pay some of the factoring fees if they can also benefit from early payment. Factoring ensures that suppliers are paid on time and that is the only way to treat a non-equity partner who succeeds when you succeed.
Factoring may not make sense for every business, but in the near future it’s an option that many will need to be explore. As we work all work through this pandemic and the recovery starts, factoring could be the difference between success or failure for many businesses. So if someone asks you why they should factor, you can always share this blog and tell them that it’s their Bridge to Bankability.