Over the past couple of years, being a small business owner has been tumultuous for most, and even fatal to business for a growing number of people. As the small business closures are beginning to rise back to pandemic highs, businesses are looking for every method at their disposal to stay afloat.
With mixed and often non-existent help from local, state, and federal governments, small business owners are finding themselves in often precarious and complex financial situations. Now more than ever, it’s important that small business owners understand all of their available options, with one such option being quality invoice factoring.
In this blog, we’ll discuss the common sentiment about invoice factoring in the age of the pandemic and how further developments may affect small business use of the financial service.
Factoring: A Brief Snapshot
Invoice factoring sounds like a modern financial tool invented in the modern-day, but factoring is actually a centuries-old practice that has been used to finance projects both small and large. Of course, factoring has become more streamlined and accessible in the modern-day as opposed to in ancient Rome or medieval Europe, and it’s now a trusted way to access funds quickly.
If you aren’t aware, invoice factoring is when a third party purchases your uncollected invoices and sends you the money upfront with a fee deducted. The amount in fees will vary from company to company, but you as a business will receive the vast majority of the invoice amount upfront.
Invoice factoring allows your small business to have instant capital instead of waiting weeks or months to get paid for products and services you’ve sold. You don’t even need to be a small business owner to see how useful this financial service can be under the right circumstances.
How Factoring Intersects With COVID-19
So factoring has been around for quite a while and was popular even before the pandemic, but how do factoring and our current pandemic intersect?
Factoring in our current business climate becomes even more useful in allowing businesses to stay flexible and nimble, even in choppy economic waters. In fact, having cash on hand is made even more important when faced with uncertainty or instability in your industry.
COVID-19 has shown to be a formidable harbinger of instability, yet its unequal impact on small businesses has meant unequal pressure on owners. While many restaurants have been struggling since the pandemic’s genesis, small business owners in other industries have emerged largely unscathed. This means factoring may be most enticing for those more affected by this virus and its effects on normal business flows.
However, this also calls for more patience and caution when considering your options. While factoring can give you funds quickly, you may also be parting with a sizeable amount of money given your particular situation. If you lose too much to factoring, you may end up simply shifting your financial woes instead of addressing them.
Specifically, the type of invoice factoring you choose and the time for customers to pay can affect the overall amount you receive from the factoring company.
Recourse Factoring & Non-Recourse Factoring
One of the biggest aspects of factoring that you should consider is recourse vs. non-recourse. Recourse factoring and non-recourse factoring differ in how the responsibility is shifted. For recourse factoring, the responsibility sits with the business owner. This means that if a customer does not pay, the business will be responsible for paying the factoring company the expected funds.
Non-recourse factoring places most of the risk on the factoring company, which is useful in the event a customer does not pay. However, this increased risk on the factoring company usually comes with a higher fee for the services, meaning fewer funds for the business overall.
While one isn’t better than the other, it’s important to really weigh those differences before you make a final decision. Recourse factoring is the most common type, but both types can work when used with a sound strategy.
You should also know the payment habits of your customers before agreeing as well. For many factoring companies, longer timelines to be paid by customers can increase the total fees taken by the company. If your customers normally take longer to pay, you may need to take that into consideration when crafting a short and long-term financial strategy.
Trust Blú Capital With Your Factoring Needs
If you are looking for invoice factoring for your business or simply want more information, our team at Blú Capital can help. We work with businesses across the U.S. and Mexico to help them navigate their finances and thrive in their industry. From factoring to loans and other services, we are confident we can help you reach your business goals.
To learn more, get in touch with us today via phone, email, or by visiting our offices!