“I’ll gladly pay you Tuesday for a hamburger today.” Fans of older cartoons will recognize that as the line used by Popeye’s friend, Wimpy, to get a free meal. Apparently Wimpy, for all his apparent education, had a bit of a chronic cash flow problem.
Perhaps you’re a North Carolina entrepreneur who can relate to the predicament. You are just getting you operations started. Invoices for products or services have gone out. But the cash coming in the door is moving a little slower than anticipated. How do you finance your business and keep it going until the scales become more balanced?
One of the challenges of forming and fostering a new business is that options for borrowing operating funds are limited. Your business’ credit score may be low. Maybe your business model isn’t one that lenders are ready to get behind just yet. It’s at such times that alternatives need to be found. Is it time to consider factoring?
Factoring is also known as an asset based loan. It involves leveraging outstanding invoices as collateral. In the simplest of terms you take some invoices and sell them off to a third-party financing company. You get the amount of the invoice up front. You pay the factoring firm a fee. The factoring firm then handles collecting from your client.
The availability of cash might make factoring attractive — perhaps even necessary at times. But there can be risks. The amount you can borrow is limited to the amount of the invoices you have. The terms of payment may not be all that advantageous to you. You may alienate your clients and lose business. You probably can’t rely on it as a long-term financing option, so you have to be sure you can get your own business collection strategy up to speed.
Factoring may work in some circumstances, but to be sure that it’s right for your situation it’s important to fully understand how it works, how it can go wrong and what other legal options may exist.
Source: fitsmallbusiness.com, “What Invoice Factoring Is and How It Works,” Pryanka Prakash, June 15, 2015, accessed Aug. 26, 2015