Factoring as a way to grow businesses may be getting a lot of attention these days, but it’s not a new concept. History tells us that the practice of selling accounts receivable for a quick influx of capital came to our shores with the Mayflower. However, it’s been a popular form of financing for centuries all over the world. It’s helped merchants expand, explore, and succeed through history to the present day partly because it’s such a flexible option. This flexibility allows businesses to adapt it to their needs.
The modern form of factoring developed in the textile and fashion industries. At the time, banking restrictions didn’t allow companies access to the amount of capital they needed to keep production on pace with the fashion seasons. Because of its long sales cycle and changing consumer demand, textile companies must continue to produce new products, even before they see a return on the prior season. In the meantime, any unexpected expenses could impact the business or even shut it down. To ensure cash flow is consistent, businesses in this industry rely on factoring.
That’s just one historical example of how factoring can be a lifeline for small businesses or a continuously beneficial part of their everyday operations. The examples below illustrate the diversity of factoring and may spark some ideas for how to use factoring in your own business. To explore further, don’t forget to reach out to a qualified broker who can show you how to tailor factoring to your individual needs.
Shipping and Logistics
Although it can seem like goods arrive by magic, the truth is a lot of effort goes into making sure what you ordered yesterday shows up on your doorstep today. Shipping and logistics companies often don’t get paid until after delivery. When high volumes or long distances are involved, the company has to pay their drivers, maintain their vehicles, and cover the cost of insurance with the capital they have on hand.
For mega-corporations, this delay doesn’t cause a problem because they have a huge client base and a massive fleet of trucks at their disposal. For a small business, however, it’s a different story. To boost working capital between payments, many shipping companies rely on factoring. Factoring means they don’t have to wait to process accounts receivable before they can send their trucks out to make deliveries. Without the cash flow from factoring, they could easily be overshadowed by their competition.
Healthcare Providers
Doctors, dentists, clinics, and hospitals must navigate the long and often convoluted process of insurance billing. This process is so complicated that there’s an entire profession dedicated to doing just that. Medical billing and coding specialists learn how to work with insurance companies to invoice the right services at the right time. Even so, healthcare providers must wait for their billables to make their way through long insurance timelines.
As with the previous examples, factoring can increase cash flow to cover the business’s expenses while they wait for the insurance companies to pay. Factoring has the added benefit of taking accounts receivable tasks off their plate, making accounting easier. Many factoring companies specialize in healthcare billing, so they understand the unique needs of this industry.
Construction
You might not imagine the fashion industry and construction would have anything in common, but both have to deal with exceptionally long payment cycles. It’s not uncommon for a construction firm to wait 120 days for payment on a completed job. That’s an entire quarter! How does a small construction company bring in materials, supplies, and labor in time for the next job? You guessed it – factoring.
Construction financing presents unique challenges not seen in other industries. These challenges have given rise to factoring firms that specialize in servicing this business sector. They accelerate cash flow for contractors, allowing them to take on jobs they would otherwise be unable to finance. While it’s not easy to adjust a construction loan, factoring is fast, convenient, and adapts with you as you take on jobs.
Recruitment Agencies
Recruitment industries discover, screen, and place talent for tasks as diverse as data entry, medical diagnostics, IT, and environmental testing. While their goal is to make an ideal client-talent match, companies and workers can end a contract at any time. That puts a kink in the agency’s revenue stream until they can place another job candidate. Factoring covers that gap when the agency leverages its accounts payable to boost its cash flow.
Job board fees, background checks, recruiter salaries, and agency fees mean a recruitment agency can end up paying thousands of dollars upfront before making a job placement. In a competitive job market, they keep pace by grabbing talent before another agency can. But it’s hard to attract new talent fast when relying solely on receivables. If you work with recruitment, do your team a favor and talk to a broker about factoring.
Talk With a Broker Today
These are just a few examples of industries where factoring can be instrumental for growth. If some of these cases resonate with you and your business, talk to a broker about turning your unpaid invoices, purchase orders, and contracts into cash flow. You’ll learn how versatile this financing solution can be without the need to enter a long-term commitment. Contact our team today to see if factoring is a fit for your business.