Different from a typical loan, a business factoring loan is the sale of assets to a financial institution, or what is known as a factor. Essentially, your company is taking its accounts receivable and invoices and selling those to a lender. The rationale behind such a premise is this: let’s say your firm needs cash now, whether for purchasing new equipment, keeping a positive cash flow or dealing with day-to-day operations. The problem is that these outstanding invoices are coming in more slowly than anticipated (and this can happen, especially in specific industries). With a factoring loan, you now can get the funds you need from those accounts by selling the debt and thus acquire the working capital necessary in a far more timely manner.
A Couple of Key Things to Know About Business Factoring Loans:
The factor, or financial company purchasing the invoices, will want to know about your customer’s payment history. After all, they will be collecting the money owed directly from that client, so having customers with a solid record of payment is critical.
When purchasing the accounts receivable, the factor generally gets a discount on the total percentage owed. This can be anywhere from 2-7%. So this is not something that you want to do to get cash quickly continuously, but for a short-term solution, it is worth considering. You will generally receive about 75% of the amount up front, and then once the factor successfully collects on the invoice, your company gets the balance.
A First Union we would be interested in discussing a potential factoring loan with you. We have designed our flexible financial products with small businesses in mind; you don’t have to struggle—there are economic solutions out there that can help!