Credit Cards and Bank Loans VS Factoring. Which is best for a small business owner?

A small business owner who is trying to grow their business during a booming economy will encounter some obstacles when applying for traditional financing if they can’t show an extensive profitable history. Now throw in the current economic climate and the chance of an entrepreneur obtaining a conventional bank loan is slim to none. When loans are no longer an option business owners have to find a funding option to keep them from having to dip into their personal savings or relying on friends and family for operating cash.

In the past, the main fallback has been small business credit cards. During better economic times credit card companies actively pursued the small business market. Entrepreneurs were enticed with low introductory rates accompanied with high credit limits. In addition, banks started offering small credit lines to business owners who didn’t meet conventional loan requirements, and these entrepreneurs started to rely on them.

As the economy worsened, entrepreneurs began to see their interest rate go up and their credit limit go down. With credit card delinquency among small business owners on the rise, the banks and credit card companies say the only way to decrease the risk to their portfolio is to make changes with their small business accounts. As a result of this, many small business owners have seen a large cut in their credit limits.

Now that access to bank loans and credit cards are hard to come by, where can these small business owners find funding?

Through factoring!

Now, more than ever entrepreneurs are in desperate need of a factoring company that understands their needs and today’s market. If you think about it, spot factoring is similar to using a credit card. Many small business owners use credit cards to purchase their inventory and then pay down that bill as their customers pay them. With factoring, a business owner can just as easily sell their invoices to a company like River Rock Financial and receive cash immediately on those invoices. In turn, they can use that cash to purchase inventory, pay their employees, etc. In both cases, the entrepreneur has cash readily available to meet the demands on their business.

These funding methods may sound exactly the same. However there is one very important difference. When a bank or credit card company agree upon a credit line and interest rate for a small business it is based on the financial strength of the company, or it’s owner. During hard economic times the credit card companies view the normal ups and downs of a struggling small business too risky.

However, with factoring, the credit decision is not base on the business credit. Instead, the decision is based on the creditworthiness of the company’s customers. Remember, many small businesses often sell to larger, more established companies. Because these companies are financially sound, they have the ability to continue paying their vendors, even during hard economic times. In other words, when a small business owner uses factoring, they can literally leverage the creditworthiness of their customers!

Factoring is the perfect funding solution for those small business owners who are unable to qualify for traditional financing or having difficulty getting a reasonable rate on a small business credit card.

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Why is factoring used?

Spot factoring, or accounts receivable factoring, helps a business obtain cash when invoices sent to other businesses have not been paid and their cash flow is below adequate levels. The business will sell some of their accounts receivables to the factoring company who will then assume the responsibility of collecting the debts that are owed.

So why is factoring used? There are two main reasons. A business may have a cash flow that is larger one month than the other, with some months coming up short. Therefore they can not meet their payroll, continue to grow their business or maintain their usual standards and operations. When this happens it may be necessary to use factoring in order to balance the cash flow and meet financial obligations. This allows the business owner to carry on their usual operations without the worry and stress of not having enough cash on hand.

The second main reason factoring is used is to collect on debts that are long holding. What some people aren't aware of, when companies are not paid money that is owed to them their cash flow decreases and their input and output become imbalanced. When this happens the company may need short term cash on hand to continue with their business dealings as usual. Factoring is used somewhat like a collections agency; however you no longer have any recourse to the money.

Spot factoring has become a large part of business financial management with many businesses seeking the best way to provide the best service to their clients without any interruption. This includes clients that have delayed pay schedules. Factoring allows the business to proceed with business as usual with quick access to short hand funds anytime they are needed.

Comparing Factoring Companies

Factoring is a great way to make your invoices work for you today instead of tomorrow. Building a working relationship with a trustworthy factoring company just makes good sense. It’s essential to keep in mind that not all factoring companies are the same.

There are some important things to think about and consider before you choose your factoring company.

1. Application Fee- Some companies charge a fee to see if they will work with you. These fees can be rather high, and $100-$150 is often considered to be reasonable. At River Rock Financial we do not have an application fee. We work with you at no charge to see how we can best benefit your company by getting you money to invest in your own future.

2. Due Diligence Fee - This is very similar to the application fee. You should not have to pay for both fees as they are basically the same thing. A reputable company is in it with you for the long haul, so they should not be making money on upfront fees. At River Rock Financial we do not charge a due diligence fee.

3. Reserve Amount - All factors are going to have a reserve amount. We will fund from 10-90% of the face value of your invoices, depending on your companies needs. A reserve is typically between 20-30% of the invoice amount, depending on the transaction. We have a set 10% hold back, 20% for construction companies.

4. Minimum Number of Invoices - Most factoring companies will require a minimum number of invoices to be factored, some will even require all of your invoices. At River Rock Financial we believe that you should have the flexibility to pick and choose when you need to factor. You can sell as little as one invoice! We can go over the percentage of portfolio on a case by case basis.

5. Renewal Fee - This is a fee that some companies will charge annually. We want your business and do not charge you any sort of renewal fee.

6. Invoice Copy Fee - Some factoring companies will actually charge you to copy your own invoices! If a company charging this it’s usually a good indicator that they will have other hidden fees as well. We do not charge you to copy any of your invoices or forms.

7. Long Term Contract - Often factoring companies require you to sign a long term contract. River Rock Financial does not have a set contract. We simply have terms and conditions that outline how business will be conducted. This means that you are not tied down to sell a specific number of invoices, or be locked in for any length of time.

8. Help Screening New Accounts - Before taking on a new account some companies will help you screen their credit worthiness, at a fee. This is a completely optional service that we are happy to help you with if you so desire, at no charge.

There are many things to consider when choosing a factoring company. At River Rock Financial our mission is to help your business grow by providing you with the financial support that you require to either compliment and enhance your current sources of financial support, or to act as a bridge to conventional sources not yet available to you.