Many small and medium sized businesses know they need a secure source of cash, but are hesitant to borrow money or sell stock in their company. Loans add interest costs and create the risk of losing the company if a payment is missed. Selling stock means welcoming in new investors who, as partial owners of your business, may have all sorts of demands or unwanted advice.
A factoring company provides alternatives that don’t involve taking on debt or investors. A factoring company like Alpha Capital buys your accounts receivable at an initial discount and then forwards the remainder of the invoice value, minus a small fee, to you when the invoices are paid. Once a relationship has been established, factors also fund purchase orders, or lend money collateralized by your inventory and equipment.
While factoring might be an excellent funding solution for your business, it’s important to understand what it can and cannot do. Furthermore, it’s vital to find a factoring company that is a proper fit for your business. Here are some considerations to help you select the right factor company for your needs:
Understand where factoring fits in:
We often field inquiries from start-up companies looking for seed money. If you need cash to get your company rolling, a venture capitalist, angel investor or bank might be able to advance you speculative capital. Invoice factoring is a different story. We provide cash advances on your unpaid sales invoices. In other words, you have to be operational and selling in order to benefit from invoice factoring. We can’t help you organize your business, but we can accelerate your access to cash and growth once you’re established.
If you do have unpaid sales invoices that you wish to factor, you will want to identify a factoring company that is set up to handle your volume of business. For example, Alpha Capital specializes in factoring lines from $250K to $5 million. There are plenty of smaller factoring companies if your needs are more modest, and they are your best bet for A/R financing. Some customers have huge requirements for cash advances, meaning that they should consult with the few national factoring companies that can handle your request. It’s important that one of the first things you do is research what funding criteria the factoring company bases its decisions on and whether those criteria will allow the factor to give you what you need.
Can you use a specialist?
Many factoring companies offer their services to companies in just about any industry. However, your company might benefit by finding a factor that specializes in your industry. For example, trucking factors tend to also include gas cards in the funded assets, something that a general factor will probably not do. Always ask your potential factor what additional services and expertise they offer.
Use the Appropriate Factor
You can make the process of selecting a factor much more productive by evaluating whether you have the required assets, whether the factor can provide you the amount you need, and whether specialized factoring is available in your industry. If you’re having trouble identifying a factor that best suits your needs, contact the friendly folks here at Alpha Capital. Even if we are not a good fit for your business, we’d be happy to answer any question and perhaps point you to a more appropriate solution. You can also consult with your bank or perform an Internet search to expand your choices.