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Small Business Loan Alternative: Consider Factoring

Jan 16th 2011 at 8:45 AM

In these economic times, small business credit is almost an oxymoron.  Whereas small business is responsible for almost all employment growth over the past three years, it is being starved of essential capital for operations and expansion.  There is a source of equity-based financing called "factoring" that is available and can be used.

What is factoring?  Wikipedia defines factoring as follows: "Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three."

So, the creditworthiness of the small business doesn't come into play; more so, the creditworthiness of the small business' customers is really the point.

A young friend of mine opened a computer shop years ago.  He was an outstanding salesman, and the new business showed great potential.  The rub was he would sell the first week of the month and use up his lines of credit and available cash, then he'd have to wait thirty days to collect his monies.  Then he could repeat the cycle.  The lag period waiting for collections was "killing" him.

I introduced him to the concept of factoring and within a month he had completely changed his sales process.  Within sixty days, he no longer had an interruption in sales, and could sell continuously -- growing his business much faster than he had ever imagined.

Small business loans were not accessible to him; he'd already used a $75k SBA Loan to get the business started.  His company had no credit history to borrow against.

Factoring is not a universal solution for all small business woes. However, if you have accounts receivable from companies with sound financial credit histories, you can most likely factor the receivables and get immediate cash for operations and expansion.

Here are some links for companies that advertise that they provide factoring (please note:  I have no interest in these firms, nor have I personally done any business with them so I cannot attest to their business character):

Please feel FREE to comment on your experiences with factoring and recommend companies that you personally have had experience with.  Enter the conversation or read more at Free2Biz.

Please to comment
Jan 27th 2011 at 8:32 PM by Free2Biz
Good points. Thanks for sharing your information.
Jan 27th 2011 at 1:07 PM by igytomas
It is on some occasions very good solution - improved cashflow. But you have to be careful to whom you factor out and what is your relationship with your unruly customer. It could be 1-off issue but you may loose good customer. And it is not free service. For doing this continually one must have great margin to 'share' with factoring company.

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