There is defining moment that happens to most small business owners when you have to decide if you are going to plod along like a “mom & pop” shop or really go for the brass rings. We would all like to say there is no option but the brass rings. The reality is that making the leap from start up to viable business usually requires a lump sum of cash. Recall the old adage, “It takes spending money to make money.” As a marketing professional for small businesses I frequently witness the pained look in the eyes of an entrepreneur as they reach plateau that demands a cash investment they don’t have to take the business to the next level. When your cash flow does not support the necessary change, factoring is an option when a traditional business loan is not available.
For anyone not familiar with the term, factoring is way to sell your accounts receivable (your customer invoices) at a discount price. It works for companies that send invoices to their customers for products or services and then wait to be paid. The interim waiting period can put a hold on you cash flow when you need it badly. The “factor” is a firm that basically pays you for a portion of those invoices up front and a second portion when the customers actually pay the bills. (You must instruct your customers to pay the factoring firm directly.) The factor keeps a portion of the payment in exchange for fronting you the money.
Here’s an example of how factoring helped one of my clients…
My client is an entrepreneur that developed an accounting software program with a far more user-friendly system than the most popular accounting program on the market at a fraction of the fee. It made it easy for small businesses to manage their finances professionally at a manageable monthly cost. This entrepreneur had already established a sound customer base when he approached major computer and software retailer to carry his product. The retail chain agreed to put the software on its shelves with the stipulation he provide live online customer support.
My client did not have the cash flow or savings needed to build this type of website, and found himself in a crunch. Spending the money on the Internet technology meant his product would hit a national market. He contacted a few factoring firms and found one that was able to front him the cash he needed for a down payment on the website, based on the monthly invoicing to his current customers. He took a small loss on his monthly income for a while, but once his product achieved national distribution, he quickly recouped the money. In this case, factoring was the tool that gave him the edge he needed to push his small business into a much larger arena.
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