Any company that is plagued consistently by slow-paying customers – whether due to the nature of the industry or to the nature of the clientele – can benefit tremendously from factoring. The 30-90 day wait period for invoices to be fulfilled could leave a serious dent in both cash flow and working capital. This is where factoring companies come in to shoulder the load for a 2-3% fee. Let’s now take a look at several of the conditions under which it is profitable to use factoring.
Issues Getting Traditional Loans
Many times, if a business lacks the necessary credit history, it can nearly impossible to obtain a traditional loan with manageable interest rates. Even if your creditworthiness is deemed moderate by the FICO metric, a bank loan can still be unprofitable because of your need to maintain a positive cash flow. If your company operates in a “risky” industry, this is yet another reason obtaining a loan can be difficult.
This is where accounts receivable factoring shines. It doesn’t depend on credit history. Also, it provides you with an alternative line of cash flow that in no way inhibits your primary one. There are quite a few reasons why factoring is a viable replacement for traditional financing.
Companies Undergoing a Transitional Phase
This refers, primarily, to companies that are trying to turn things around. During this stage of going from a perhaps poorly-managed company to one with new management and a new vision, securing funding through traditional means is virtually impossible. If you have purchase orders and old clientele, however, this looks good to prospective factoring companies.
As we have seen, factoring can be excellent for SMBs, startups, companies with poor credit and turnaround situations (companies undergoing an overhaul or a transition). If you would like to get more in-depth in this and other business topics, the Achieve Capital Advisors blog, and website is your one-stop-shop for all matters finance. Visit us today.