Small Business Factoring: Is It Worth the Initial Profit Loss?

Factoring companies offer small businesses a way to get their outstanding accounts receivable transactions squared away without having to have the staff and infrastructure for their own collections department. While small business factoring companies do take a percentage of money acquired, in most cases it is well worth the small loss in order to get the outstanding dues paid.

Large companies and firms that send out thousands of invoices for small amounts of money will likely find factoring economical. This is because factoring companies base their bids on the credit report of the indebted customer rather than your small business. Factoring companies charge for every invoice or account they have to investigate for credit rating information.

For instance, if you have two hundred customers with outstanding accounts receivable of $50 or less, the cost for a factoring company to investigate each and every account will cost more money than you will be saving by outsourcing this kind of work. Small businesses with large outstanding accounts receivable transactions, on the other hand, will find a business factoring loan well worth the small profit loss.

To decide if getting a factoring loan is the right choice for your business, grab a piece of paper and note down the expenses and profits of each option.

To start, figure out how much interest on a regular loan would eventually add up to. Take into account how likely you will be to pay the maximum each and every month. It’s safest to extend your estimates as far as how quickly you’ll be able to pay the loan back.

Next, do a little research online to find a factoring company that meets your specifications. The specifics of their factoring services should be listed prominently on their website, but don’t be shy about giving them a call or sending an email if you have questions. Once you have all this information, you’ll be able to make a realistic estimate about how much of your accounts’ outstanding balance you would lose by choosing a factoring company.

Now, compare the cost of you doing your own collections work against the cost of working with a factoring company. In most cases, small business factoring saves money and extra stress in the long run. However, every business, business model and financial situation is unique and should be given individual attention.

By analyzing and balancing the data gathered, you will be able to see what choice is best for you and your small business. If you need money in hand right away, a small business factoring loan is a reliable and effective way to get just that. You may lose some money up front, but if you invest your sudden influx of cash correctly, it’ll make you a bundle down the road.