In such an up-and-down economy, getting a small business started only works for the ambitious and the motivated. There are no lucky breaks or easy loans you can take out to ease the process. It’s all about trusting in your idea and having a plan of action. Unfortunately, getting a small business loan has become quite difficult. This puts many people in a tight spot when it comes to starting a business. The economy needs small businesses, yet there are few loans to be given out. It’s really a catch 22.
However, there is the option of accounts receivable (AR) factoring that works for some business owners. As with anything there are ups and downs, but this is one way to get the funds you need when you need them.
How AR Factoring Works
For those who are unfamiliar, AR factoring is when you sell invoices to a financial company called a Factor. It is almost like an IOU. The Factor knows that you have sent invoices, or bills, out to customers and clients, so they will give you the money early knowing that you will be able to pay them back.
Many people compare AR factoring to a credit card. A store may sell you a TV on your credit, meaning they will accept a credit card payment. This is a promise that you are going to pay them (it’s more like the bank is promising the store that they will get paid and the customer is promising the bank that they will get paid, but you get the point).
What’s In It for the Factor?
This works out well for the Factor because they charge an initial fee and you have to pay what is called a discount rate on all of your invoices. The discount rate is generally around 2-5 percent, but the rate is often discussed before committing. A Factor will usually look at your customers’ payment history, the size of your invoice, and the number of invoices before coming up with a discount rate.
Here is an example that may help put things into perspective: Pretend you owned a business and you billed a customer for $100 that was due in 30 days. If you want to sell that invoice to a Factor, the Factor might charge you a $3 set up fee and a 3 percent discount rate. Therefore, you would get $94 from the Factor and the Factor would get the $100 from the customer when the money is due.
What’s In It for the Business Owner?
Although it may sound like a bad deal at first, there are some benefits to AR factoring for a business owner:
- AR factoring is not concerned with your credit history. It is concerned with the credit history of your customers.
- You can choose which invoices you want to have factored. This makes it easy to pick specific customers who you know will pay their bills on time (or at least your best guess).
- The money is available in just a few days (in some cases even 24 hours). Bank loans take between one week and one month to come through.
- You do not get one large cash amount, but rather a steady flow of funds.
- These funds are very readily available. It’s hard to get a small business loan, but AR factoring is still a sure bet.
Although a bank loan may be the only way to start a small business, AR factoring is a great way to keep a business alive. AR factoring doesn’t offer quite as much money as a bank loan, but it is a great way to get you that extra cash when you need it.
If you think AR factoring is right for you, it’s important you look for any contract obligation, minimum sales requirements, and any hidden fees. Some Factors will even give you your own AR agent to help answer your questions and get you going in the right direction.
Author bio: Amanda Rodriguez is a writer for Credit Card Help, a comparison of the best Australian credit cards where she gives financial advice to small businesses and entrepreneurs. Visit the website to apply for balance transfer cards and learn more information about how you can get your company finances in order.