Even profitable businesses, large corporates can have cash-flow issues. This is especially true in all the industries such as apparel, construction, food and beverage, government contracts, hospitals, and nursing homes, importers and exporters, manufacturing, staffing, transportation, and wholesale/distribution. The key to closing the gap is having access to the right form of capital in the appropriate amount that is needed. Alternative finance such as invoice discounting, factoring and forfaiting provides a very useful product for very specific circumstances for a business.
Factoring / Forfaiting means that a business sells its accounts receivable (invoices) to a third party (called a factor) to get its money quickly rather than waiting for the customer to pay directly. It provides a flexible funding strategy. It’s not equity because you don’t give up a piece of your company. However, invoice factoring can provide the financing your company needs. The factor then owns the invoices and gets paid when it collects from your customers.”
Factoring is particularly useful when your startup or small business doesn’t qualify for traditional financing and established players to grow the business, when you need to supplement an equity raise or when you need money faster than banks can deliver it. The application process is typically quicker and simpler than a bank’s.
The benefits of qualifying based on your customer’s creditworthiness, not yours, an easier application process and speed of receiving money can outweigh its costs. You must understand the costs and compare factoring to traditional loans. Your finance team or advisor can help you do a comparison by calculating the equivalent APR based on the factor’s discount.
