Is it boom or gloom? Can factoring be the answer?
If you have been reading the papers a lot this year already you might have noticed a few articles popping up about the boom in invoice factoring. The constant articles skewed towards banks restricting lending and tightening up on criteria seems to be the constant theme of gloom in the small business finance sections of the papers.
A recent article on afr.com talks about factoring booming in 2009 with the factoring industry up 21 percent on the previous year which has been fuelled by payment terms according to Dun & Bradstreet, being stretched out by debtors to over 55 days.
So why is factoring an answer to funding small businesses through this gloom period? For the most part the papers are correct in saying that banks are turning away small business owners for overdrafts and increases on existing facilities. If funding can be obtained from a mainstream lender, the red tape is usually very tough with a squeaky clean history, property security and good prospects required.
Factoring has been around for hundreds of years hovering in the background and has gained massive popularity in places such as the United States and Europe. In times of recession in the United States, factoring businesses are considered to keep the liquidity in the market or cash flowing for businesses when banks stop lending. Getting access to cash becomes crucial and compounding the effects are real estate prices either dropping or staying flat restricting the equity available to use.
Factoring or debtor finance as it’s sometimes called is the flexible alternative to a bank overdraft. It does not require real estate security, has massive benefits in flexibility, credit reporting, collection of invoices and sometimes doesn’t restrict the amount of working capital you can access as your business grows. Think about never having to make monthly re-payments again, when you present an invoice to be funded it is simply repaid when your customer pays the invoice. Of course there is a service fee for accessing the money, however think about the benefit of getting your money as soon as you raise an invoice not to mention you won’t be giving your customers that 30 days interest free period (let’s face it, how often do your invoices get repaid in 30 days…rarely!).
There other benefits of course, however the hard facts are that you get your money atleast 30-60 days ahead of when you would normally allowing you to take on more work or buy new products. Paying your bills on time and your staff relieves a lot of the stress you get when running a small business.