Historically, factoring has not been well known especially among small business owners.

Factoring now accounts for more than $1 trillion a year in business funding. That is more than three times what it was in the early 1990s. Since then, factoring companies have become more reputable and service oriented while providing readily available funds to businesses that are challenged with cash flow issues.

Although factoring has not generally been well known in the past (except in a few specific markets like textiles and transportation) it has recently become a sought-after cash flow management tool for the small to midsized business (SMB) market across many industries. This is recently, in a large part, due to big companies slowing their payment to small businesses (see article “Big Companies Are Slowing Supplier Payments”) creating severe cash flow problems for these smaller suppliers.

For those unfamiliar with Factoring, it is the process of a business acquiring cash by selling its accounts receivable (invoices) at a discount to a factoring company. The discount, or cost to the business is equivalent to a prompt pay discount a business might otherwise offer to a customer account . The business receives the cash upfront from the factoring company and the factoring company takes responsibility for processing the receipts under lockbox control. It can take time to collect on an invoice, so when a company factors its accounts receivable, the company essentially gets its funds up front while the factor manages the process of collecting the payment remittances — saving the company time, money and positive cash flow.

Factoring allows the small business owner to retain control of their company and gives them the ability to grow quickly or at a moderate pace. It is all about control and cash flow management. More savvy business owners will work the factoring fee into the product or service provided. Others use the extra cash to take quick-pay discounts from suppliers by paying early. With the right financial strategy, factoring can also provide long term cash flow management, not just a quick fix.

As more and more small businesses discover the benefits of factoring, new industries are warming-up to the idea that there is a readily available source of cash hidden within their accounts receivable. In fact, factoring has become so much a normal part of business financing, that universities are now teaching it in relation to cash flow management.

With FDIC reserves plunging to $10.4 billion from $45 billion last fall and the number of troubled banks rising to 416 from 305 in the first quarter, more pressure is being put on banks to “shape up”.

Although the economy is showing clear signs of recovery, the banking sector may not rebound any time soon. It’s possible that the continued problems in the banking industry will substantially outlast the recession, resulting in a significantly suppressed availability of credit in a recovering economy.

With many banks struggling to keep their doors open, small business owners seeking financing, who are already finding limited options, are faced with desperate cash flow issues. As businesses attempt to recover along with the economy, they need financing solutions now.  It is critical that businesses acquire a funding source that is readily available and dependable.

Accounts Receivable Financing is an often overlooked choice for growing businesses. This form of financing (also known as Factoring), is a financial tool that allows businesses to capitalize on the power of their outstanding invoices. Factoring is a valuable mechanism to turn a business’ invoices into immediate cash, enabling them to fund business operations.

It is not widely understood, but a factoring firm provides funds to its clients based upon its clients’ accounts receivable. Most invoices billed to credit worthy customers can qualify. Banks, on the other hand, must consider more stringent criteria before qualifying a borrower for any type of funding. In most cases, when considering assisting a business based strictly upon its accounts receivable, factoring companies can provide funds when a commercial bank cannot.