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The Benefits of Small Business Factoring

A small business generates most of its income through the sales of a single product. In order to maintain its position in a highly competitive industry, small businesses have to offer both credit and cash sales. Credit sales are offered to customers who buy in large quantities and choose to forego the cash discounts associated with bulk buying. In the short term, offering credit sales is good for the business. These sales increase the debtors’ account, which shows up as an asset on the balance sheet.

However, from a cash flow perspective, a larger balance in the debtors’ account is not a good sign, especially for a small business. It indicates that the business is having trouble recovering the money from its debtors. If a customer fails to pay over the course of a year, most businesses generally record it as a loss, or bad debt. However, small businesses cannot afford such losses. Delays in payments not only reduce the size of the working capital, but it also puts a strain on the business’ already limited resources. That is why small business factoring is a great option for such entities.

What is Small Business Factoring?

Small business factoring services are offered by financing companies. The financing company oversees the Accounts Receivables of a business, and after analyzing different aspects of the business and its customers, offers a percentage of the balance in the debtors’ account in cash. This is not a loan. If the business accepts the terms and conditions, the financing company is then put in charge of recovering the payments from the debtors.

Small business factoring services are extremely useful for smaller entities that have very limited working capital. By making sales on credit and not receiving the money on time, businesses are unable to generate cash. This hinders their ability to continue day to day operations, such as make payments to creditors and expand operations. Small business factoring can provide a boost to the working capital within a few days.

How Do These Services Help?

Small business factoring services are a great option for many businesses that find it difficult to translate their receivables in to cash based income. This not only deters investors, but also limits daily business activities. With their already limited resources, businesses have to focus on debt collection as well.

By factoring the company’s receivables and financial assets, small businesses can continue their operations without having to incur major losses. While the business must pay a small fee along with interest to the financing company, the amount is still lower than the profits that will be lost should the business decide to focus on debt collection and limit its primary business activities.

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