Factoring Offers Financing Alternative for Small Businesses
While approaching a lender is the most common way to raise capital, it's not always the best or most viable solution for a small business. If a bank loan isn't an option for your business, factoring can help.
Factoring is the purchase of a business' accounts receivable. Large corporations have long used this method to increase cash and reduce the management of receivables, but it is now becoming a popular option for small businesses, as well, said Dave Kurrasch, vice president and general manager of Small Business Payments Company, which develops financial solutions for small businesses.
Factoring is an alternative to asset-based lending and provides businesses with capital when they need it. It is particularly appealing for businesses that need cash, but have limited sources of credit, he said. "Factoring is a fantastic method to convert inventory or work product into cash to pay vendors, payrolls, taxes or other obligations."
Moreover, because factoring rids small businesses of receivables, it allows them to reduce or completely eliminate collections. "Managing the working capital conversion cycle is crucial for businesses that produce receivables with long collection terms," Kurrasch added. "Factoring is a real option for shortening or eliminating collection times."