Factoring 101 Blog - Acounts Receivable Factoring and Other Industry News

Small Business Factoring for Your Small Business

Running a small business is not an easy job, and while your business may be small, the decisions you need to make are oftentimes big ones. Of course, one of the most difficult decisions you will make is deciding how you are going to finance your business. While finding a financial partner may seem like a daunting task, especially since most banks probably aren’t willing to work with you, the truth is that are plenty of options out there available to you. To further complicate matters, there are many more companies out there that are offering these financing solutions to small businesses. So the tricky part is not just finding a solution that is right for you, but choosing the partner that is right for you as well. One important aspect to keep in mind is that you want a company that is willing to work with you to meet your needs in the same way that you are willing to work with your customers to meet theirs. Luckily, financing solutions are available to small businesses from other small businesses, so you know that you will receive the level of support you need to keep your business well financed and running smoothly.

Accounts receivable factoring is one of the most popular ways to finance a small business. To qualify for factoring is simple, as long as you are billing other businesses for your goods and services you can factor your receivables. Factoring only works with B2B, or business-to-business, transactions, so is a great option for manufacturers, importers, and wholesalers.

There are handful of reasons why factoring is a great option for small businesses, but one of the most important reasons is that credit decisions are based on your customers’ good credit and not on your own. When you factor a receivable, your factoring company is actually purchasing your receivables, or invoices, from you. As a result, it is the responsibility of your customer to pay back your factoring company and not your own. This of course brings us to another important feature of factoring, it is a form of debt-free financing. With non-recourse factoring you are under no obligation to pay back your factoring company if a customer is unable to pay an invoice. We will cover more on non-recourse factoring later.

The Benefits of Factoring

The main reason most companies choose to factor is for the financial benefit of having improved cash flow. Factoring companies will pay you for your receivables the same day you invoice your customers, speeding up your cash flow by 30 days or more. You no longer need to wait until an invoice becomes due to receive payment. If you’ve held off on offering payment terms to your customers because you are unable to wait to get paid, with factoring you can offer your customers the payment terms that they are asking for. Not only will doing so make your customers happy, but it may even encourage them to place larger orders knowing that they will have time to pay for them.

However, factoring companies do much more than just speed up your cash flow. Factoring companies will also handle all of your credit checking for you, helping to ensure that your customers will be able to pay their bills. The benefits of this are two-fold. First, you get the reassurance that your customers are credit worthy. Second, is you don’t need to subscribe to expensive credit rating agencies as your factoring company will do this for you.

Another benefit of factoring is that your factoring company will handle all of your collection work for you. You no longer will need to call your customers requesting payment as this becomes the responsibility of your factoring company. Not only does this free up more of your time, but it also allows you to focus more on making additional sales to your customers when you call them instead of having to ask them to pay their bills. Factoring companies also typically are able to collect a bit faster because if a customer falls behind on their payments to a factoring company, then they may be unable to place new orders with several other of their vendors who use that factoring company. When customers pay their bills faster, they also able to place reorders faster as well which could lead to increased sales for you.

Finally, there is the benefit of having credit insurance. If your factoring company offers non-recourse factoring, then that means that they are fully insuring your invoices against non-payment for financial reasons. While credit checking your customers should go a long way in ensuring that your customers have the ability to pay for their order, no one had a crystal ball. Just because a customer appears to be in good shape when they place an order, does not mean that they will still be in good shape when a bill becomes due. Unfortunately, two years ago we saw a perfect example of why credit insurance is so important. When the pandemic hit, most businesses were forced to close their doors temporarily, but for many those closures became permanent. If you had outstanding receivables with a company that didn’t survive the pandemic, then you would simply be out that money unless you had credit insurance to cover it.

Small Business Factors

Of course, just like with any industry, there are some factors who are very large and some factors who are small businesses themselves. While most factors are willing to work with small businesses, choosing one that is a small business itself can be quite beneficial. Of course, when you work with a small business you get the satisfaction of helping out another family-owned small business, but there is a lot more to it than just a sense of personal satisfaction. All factoring companies have rules that need to be followed, however, a small business is much more likely to bend those rules to help you out if they are able to do so. A perfect example may be with deadlines. A large factoring company may have a strict cutoff of noon to submit invoices for funding, while a smaller factoring company may have that same cutoff but it probably isn’t as strict. While it is true that all factoring companies have to deal with rigid banking deadlines, usually cutoff times for submitting invoices for funding occur before those banking deadlines as the factor needs time to process the invoices and your payment. As a result, if you have smaller factoring company, oftentimes you can tell them that you will be a little late in getting your invoices in, and they will then work extra hard to ensure that they can get them processed and paid before their banking deadline.

Another benefit of working with smaller factoring companies is who you get to speak with. Larger factoring companies will assign you an account manager. These account managers are simply employees who will do their best to answer your questions and make sure that you get funded. While they may be great for anything that is business as usual, the problem is when you may have an unusual request. They may not have an answer to your question or be able to help with an unusual funding request. You also may have to deal with someone unfamiliar with your business should they go on vacation, or find a new job. With smaller factoring companies, you typically can speak with the owners of the company. As a result, they can answer pretty much any question you throw at them, and if you have an unusual request then they will figure out a way to make it work. While it is true that they too may go on vacation from time to time, you will still be able to speak to other family members of principals at the office who are also very familiar with your business and will be able to help you out with whatever you need. Of course, you’ll never have to worry about the owner of a business leaving because they found a new job!

Finally, small business factors may be able to offer you help beyond just factoring. Many small business factors also offer purchase order financing to their clients. With PO financing you can get an advance to pay your suppliers in order to fulfill a large purchase order. This advance then gets paid off through the proceeds of factoring the resulting invoice. PO financing can be extremely valuable when you first start selling to major retailers, or when a major retailer starts placing larger or more frequent orders for your products. Having access to PO financing is crucial for anyone who is hoping to grow their business.

Why Choose DSA Factors?

DSA Factors is a small family owned business that has been providing accounts receivable factoring for over 35 years. At DSA Factors we pride ourselves in the service that we are able to offer to our clients. Whenever you call us you will always be able to speak with one our principals, and we can make credit decisions for you quickly, even over the phone if you are in a rush. If you are looking to finance your small business or simply just have questions about accounts receivable factoring please don’t hesitate to reach out to us at 773-248-9000, email us at info@dsafactors.com, or chat with us right here on this website.

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