Need Short-Term Working Capital? Have You Considered A/R Factoring?
Although I’m not a CPA or what I would call a legitimate accountant, I have some small business bookkeeping experience—and like every other small business owner I know, I know that cash flow is king. Poor cash flow has been the demise of many small businesses, while a strong cash position makes it possible for a business owner to welcome new business, expand, and take advantage of unforeseen opportunities.
Factoring isn’t a loan in the truest sense, but rather the sale of an asset—much like a car or piece of machinery. Basically, the business sells its accounts receivable at a discount to fund a short term need for cash.
Factoring has been around for a while in one form or another. In fact, as a means to finance trade factoring was done in England prior to 1400 and came to America with the Pilgrims around 1620. Although factoring has sometimes been thought of as the financing source of last resort, it’s gained traction in recent years resulting from a tightening of credit and the difficulty many small business owners face when seeking a loan from the bank.
Unlike a traditional bank loan, this type of financing is easier to get (albeit a little more expense), the terms are less restrictive, and the fund are available more quickly.
Not too long ago I was speaking with a consultant who had landed a fairly substantial government contract. Like many small businesses in this situation, they needed a short-term loan or other line of credit to bridge the gap between the time the contract was initiated and when they would start seeing cash flow from the contract. Unfortunately, the banks he approached all said, “No.”
“We unsuccessfully went to several banks in Virginia to find a line of credit that would help us expand to meet the needs of our new government contract, but they all said no,” he said. “The SBA loan process wasn’t going very well for us.”
They were able to factor their accounts receivables and acquire the short-term cash flow they’d need to ramp up and prepare to fulfill their government contract. Although this type of financing might not be for everyone, it does fill a real need for small business that isn’t filled by the local bank right now.
“The process was amazingly simple,” he said. “I found a lender that was more responsive and a better fit for our particular needs than the local banks we were talking to.”
Lendio is a great place to start if you aren’t sure about where to learn more about A/R factoring and to see if you might qualify.
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business best practices, tips and advice accessible by weaving personal experiences, historical references and other anecdotes into relevant discussions about leading people, managing a business and what it takes to be successful. Ty also shares his passion for small business every week on Forbes.com.