For many mid-sized businesses, finding a route to alternative financing can be critical to maintain business operations. In situations where traditional institutional and bank loans are rejected, a factoring company can ease the pinch and provide the necessary funds in a relatively short time.
Bank loans for businesses are becoming harder to secure, especially since the market crash of 2008. That said, it’s become increasingly apparent that economies are built on the backs of small to mid-sized businesses, and we need to create opportunities for them to thrive.
Factoring is a great cash-flow management tool for businesses with lots of accounts receivables from established customers. Unlike traditional business loans which base the interest rate on personal and business credit history, here the interest rate is determined by the quality of clients owing money to the business (the payers of the receivables).
Once set up, money can generally get to a business in need within three to five business days. The application process involves some underwriting, but less paperwork than a traditional small business term loan.
Benefits for medium sized businesses
Factoring companies like TFS offer less stringent financial covenants, allowing the company to rapidly grow or work with balance sheet/income statements that the existing bank may not support. The lender may also assist by financing the company directly as the sole lender or via an inter creditor agreement in conjunction with the primary lender, unlocking the potential of viable capital.
For a medium sized business, this can be useful for either domestic or international financing that the existing lender is unable to offer for various reasons. For example, many factoring companies offer account receivables financing at a rate of up to 90 per cent and acceptable asset based loans of up to 50 per cent.
Hence, lenders can provide something unique by financing both domestic and international accounts receivable.
When to apply for financing
When a loan has been rejected by more traditional lending intuitions. Or, there are no other assets to put up as collateral. For example, if the business does not hold real estate property or own equipment, then turning to receivable financing is a way to get the funds needed quickly.
Best practice is to find a lender that can finance both domestic operations and finance international accounts. Business expansion can happen quickly sometimes, and it’s good to be prepared. It’s also beneficial to find a factoring company that has various product offering such as Account Receivable (factoring), Asset Based lending, Supply Chain Management, and Purchase Order Financing.
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