Factoring Example for Small Business Financing

Factoring is an effective business to business transaction that allows a small  business to get the necessary small business financing needed when working capital is tied up in equipment, unpaid invoices or accounts receivables.  Normally a  factoring loan is issued to clients who have a strong track record and/or a solid balance sheet. A typical factoring situation would be where the company granting the loan would lend a percentage of the value of the invoices, usually 70-80%, then the debt would be satisfied in full when invoices are paid.  Another alternative, cash flow factoring, is where an upfront fee would be charged – 2% to 4% for 30 day invoices, and 3% to 6% for 60 day invoices.

Example: A clothing retailer needs a short term inventory loan to purchase a shipment of spring wear for the upcoming season. With 60% of the value of the clothing already sold online, a factoring loan would be issued to purchase all necessary inventory. All invoices would be factored, and the debt would be paid off in 30 to 60 days. This solution would allow for all orders to be filled in a timely manner and would ensure sustainability through the transition in seasons.

Some of the deciding factors for a typical bank loan would be the company’s cashflow, profitability, equity, and years in business.  This can mean trouble for many smaller businesses or ones that have only been operating for a few years.  In comparison, a factoring loan is granted on the basis of the strength of a company’s client base and/or its account receivables. Please contact us for more information about factoring and small business financing.