Small Business Factoring: Factoring in Place of a Business Line of Credit

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Author: capitalplus

Article source: http://www.articledeshboard.com/. Used with author's permission.

As the old adage goes, it takes money to make money. Entrepreneurs starting a new business know this all too well. But trying to find a cash source can be a marathon of disappointment, with banks demanding collateral, venture capitalists demanding stock, and both offering limited funding. Invoice factoring has changed that for many small business owners. Small businesses can use invoice financing as a business line of credit instead of using a traditional line or a business loan to pay for necessities. Using a factor in place of another entity as a business credit line, business owners can:

1. Use future receivables as current cash, thereby avoiding the hassle of paying off a bank loan
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2. "Borrow" from the credit line indefinitely with no yearly application requirements
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3. Avoid affecting personal or corporate credit ratings, since factoring is technically a trade of goods rather than a loan

Many first-year business owners in particular find that using a factoring company as a line of credit serves to help them make it past the first year of business, a period in which over forty percent of new businesses fail.

While using a factoring company as a business line of credit is easier on the credit score, its benefit can be hard to see for companies that don't have a steady cash flow, or that have a new product that needs to "make the rounds" before making a profit. Because using factoring as a business line of credit is essentially the same concept as receiving a personal loan from a bank, the future isn't always bright. If current business is slow and future receivables dwindle from the effect of the factoring process, business owners can find themselves facing some financial difficulty. Fortunately, there is room here for maneuvering, as factors usually don't require businesses to withdraw funds from a line of credit. Instead, this line of credit can expand with company success, or remain as back-up funding.

Using factoring as a business line of credit can be a profitable move, as long as business owners remember that the money they receive from factoring now will have to be replaced by future sales if they expect to continue to profit from the relationship.

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