Avoid Debt With Factoring

Small businesses have limited options for accessing capital such as personal savings, credit cards, and loans. Additionally, these forms of debt financing (i.e. small business loans) may not provide enough sustainability if sales fluctuate or business growth outpaces working capital.

Conventional loans are considered debt financing because they create a liability on the balance sheet. Debt-to-income ratios are affected and may hinder a company’s ability to obtain future loans or secure working capital. Small businesses usually seek traditional loans from banks without realizing the asset and capital requirements needed to qualify. Those businesses that meet the borrowing specifics find that the loan is too small to foster growth over time and loan processing times do not release funds quickly enough for businesses to meet current obligations.

There are some alternative forms of financing, such as debt factoring, that are known as off-balance sheet financing. Off-balance sheet financing encompasses debt factoring options like equipment leasing and factoring, both of which do not affect a company’s balance sheet.

Equipment Leasing offers growing companies:

• The ability to purchase equipment with rental payments
• A solution for securing working capital as the debt-to-income ratio does not change
• The assurance of securing enough working capital
• Rent payments that are 100% tax deductable, which would counterbalance potentially higher rental costs. 

Debt factoring is the other type of off-balance sheet financing in which a factor purchases invoices, and converts them to cash immediately. Debt factoring benefits business owners who experience burgeoning growth, but cannot meet operating expenses because clients do not immediately pay their invoices.

More specifically, debt factoring occurs after a company has delivered goods or completed its services for a customer. The company creates and sends an invoice to that customer. Simultaneously, the business sells their invoice at a discount to a factor. The factor advances funds to the business for the invoice it purchased. The factor then collects payment from the company’s customer within a previously determined amount of time such as 30, 60, or 90 days.

Benefits of debt factoring include:

• Initial processing period of 5 to 7 business days
• Ongoing fundings in 24 hours.
• Small businesses qualify based on the credit strength of their customers, not their own credit score.

Factors keep a small percentage of the payment for their services, but businesses still benefit by gaining access to immediate cash for supplies, rent, payroll, and other expenses without incurring debt. The fees are calculated based on the value of the invoice and type of industry.