GUIDES

Factoring – A Complete Guide for Small to Medium-Sized Businesses

Factoring is a financial method used by businesses to help accelerate their cash flow. Factoring is an alternative form of financing suited for small and medium-sized companies that do not have a long and established banking record with a lender.

February 01, 2022

Post-it note with "factoring" written on it near a computer

Factoring is a financing option for businesses to access the funds they have tied up in accounts receivable. Factoring is when a company sells its accounts receivable, also known as invoices, to a third party at a discount. It can also be when a company purchases a debt or invoice from another company.

Benefits to Factoring

Factoring is an alternative to bank loans for small businesses needing a quick cash influx that can’t wait for a lengthy approval process. Factoring helps cover any funding gaps due to slow-paying customers. In return, businesses improve their cash flow by allowing customers to continue on longer payment terms. Also, factoring provides financing to small and medium-sized companies that might not be able to receive capital from a bank, due to poor credit or a limited operating history. Typically, factoring companies only care about the value of the invoices being factored, not the credit or length of operations behind a business. Another bonus, factoring is considered “unsecured” financing, meaning, it doesn’t require collateral. For example, an asset such as real estate or inventory, that the lender can seize if the business fails to pay the factoring fees.

Disadvantages to Factoring

Unfortunately, with invoice factoring, after the factoring company collects the outstanding invoice, the business only receives as little as 80% of the total invoices outstanding. It’s important to consider the percentage of the factoring fee and any other fees such as service fees, credit check fees, etc., that will need to be accounted for when factoring. Another downfall to factoring is the factoring company solely controls the unpaid invoices, and they will be the ones to communicate with customers. For example, the factoring company will notify customers of the transaction and how to pay unpaid invoices. The invoice from the factoring company to the client will alert the customer to the business’s cash flow issues and could potentially hurt the company’s reputation. If that wasn’t enough to consider, when working with a factoring company – if a customer defaults or is slow on a payment, the factor may terminate the relationship. In return, the business loses a customer. Also, the factor may require a long-term contract with the business, which means giving up control of invoices for longer than desired.

A Better Alternative to Factoring

Payment and financing solutions such as BlueTape can be a convenient and better alternative to factoring. For suppliers, you have access to tools that enable you to offer financing for your trade customers at low risk while receiving payments upfront. You receive the cash flow without the downfalls of factoring. Automated AR (Accounts Receivable) As a supplier, you can automate invoice collections and send invoices via text message and email on any mobile device, which allows you to avoid chasing after unpaid invoices. Receive Payments Fast As mentioned, with BlueTape, suppliers get paid upfront with BlueTape net terms, replacing checks with quick ACH payments. Save Money With no credit card needed, you will gain access to the lowest credit processing fees through the use of BlueTape’s virtual card – saving you money on credit card processing. With a quick and seamless signup process, you can get started as soon as today with no fees and zero commitments. Simply, signup, upload an invoice, and BlueTape will take care of the rest. Create an account today and start enjoying a cash flow without the pitfalls of factoring.

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