by Keith Mabe

In the current banking environment, factoring may be a cost effective solution to obtain necessary working capital for small business growth.

Cash obtained from factoring invoices can be used as a short term working capital funding source to pay for labor or suppliers in order to deliver products or services.

Given current economic conditions, banks are still less likely open new lines of credit or increase current credit limits due to significantly tighter credit criteria.  What’s more, banks are viewing businesses with significant growth as being at high risk of successfully executing such growth.  Because of this, many small businesses with growth opportunities are not getting loans or lines of credit they need.

Factoring can be a valuable tool to support business growth.  For example: A service business has an opportunity to add a new client that requires adding new employees. The company can receive factored funds upon issuing the invoice and, in turn, use the funds for the payroll used to support the additional business. There are many other examples, but the theme is the same: Cash from factoring is used to pay for labor, materials, or inventory in conjunction with completing delivery and issuing an invoice to the customer.

Ultimately, if businesses need financing for growth, there are not as many opportunities available today. A slow accounts receivable cycle or recovering from unforeseen circumstances can put a business in a cash crunch quickly. There may be many reasons for businesses to consider factoring, especially if traditional bank financing is the least desirable option.