Factoring is an accessible means of finance that can help a huge number of different companies. Many types of business can benefit from the advantages of a fast and flexible form of funding, but what types of small business is it most suitable to? This could help you to think about whether it could benefit your business.
Factoring works by essentially borrowing money against the value of an invoice, without taking on new debt as the customer’s payment will clear this with the factoring company. It’s a way to get a fast injection of funding into your business so that you can ease cash flow and late payment worries and perhaps be able to afford growth.
This is the first thing that should indicate whether or not your company is suitable for invoice finance is whether you use invoices or not. Since factoring is based on lending against sales debtors, your company needs to sell to companies on credit and therefore retail businesses won’t be suitable for it.
Factoring is also especially well suited to companies which are growing rapidly. Normally, fast growing companies need to raise lots of working capital to allow them to continue on this growth trajectory, and factoring can help to provide this cash quickly and efficiently so they don’t get trapped by customer late payment.
Factoring lenders need to know all invoices are genuine, and therefore businesses where proof of delivery is easily obtainable are the most suitable for invoice finance, such as where physical goods are delivered. Manufacturing and distribution businesses are therefore some of the most suited to factoring. However, many service businesses such as recruitment agencies and even advertising and publishing businesses can be suited – there’s really no definitive list!
Independent lenders can often be flexible with their application criteria so if you’re not sure, it could pay to ask!