Factoring for Small Companies

If you are a small business owner who is having trouble getting financing, you are not alone. Most small businesses find it challenging to get funding when they need it. There are a few reasons for this difficulty.

Most lenders prefer to work with large clients rather than with smaller businesses. Larger clients often use multiple financial products and generate sizable fees. They also have assets and a performance track record. Lastly, they have finance departments that can create the formal reports that lenders often require.

This lender preference leaves small companies at a disadvantage. Small businesses often run into cash flow problems as they grow, but few finance companies are willing to help them. Fortunately, there are a few ways to handle this problem. In this article, we discuss:

  1. The most common cash flow problem
  2. How to fix cash flow problems without financing
  3. A solution designed specifically for small businesses

Do you have this common cash flow problem?

Having commercial and government clients can be great. They are often a source of steady work and reliable revenues. However, these clients often demand 30- to 60-day payment terms as a condition of working with you. This situation puts many small companies in a bind.

The small business must pay all expenses to deliver the products or services. Once they finish, they need to wait an additional 30 to 60 days before the clients pay them. In the meantime, they need to cover all business expenses out of their own funds.

Few small businesses have the cash reserve required to grow a business while waiting two months for a client’s payment. Ultimately, the small business has to start turning jobs away to avoid running out of funds.

Solution 1: Improve cash flow without financing

Many cash flow problems have solutions that don’t require financing. Instead, you can often fix these problems by making some changes to the business. Business owners should try these options before looking for financing.

1) Improve your invoicing and collections

Many small companies encounter cash flow problems simply because they don’t do a good job handling invoicing and collections. However, invoicing and collections are two of the most essential functions in the business. Companies can address this problem by using the following strategy:

  • Check commercial credit on all clients
  • Use well-written contracts
  • Verify the client is happy with the product or service
  • Send invoices promptly
  • Follow up regularly

2) Discounts for early payments

Improving collections helps ensure that clients pay their invoices on time. However, sometimes you need clients to pay in a few days rather than in 30 to 60 days. One strategy is to offer these clients an early payment discount in exchange for a quick payment.

Most companies offer their clients a 2% discount if they pay in 10 days or less. Otherwise, the client has to pay in their usual 30 to 60 days. Although offering a 2% discount is common, it is not a rule. Some companies negotiate better terms with their clients and offer a lower discount.

3) Work only with clients who pay quickly

Another strategy, though somewhat extreme, is to restrict your client base to companies that will pay invoices in a few days. This strategy is difficult to execute if you are in a competitive. However, it may work if your product or service is unique enough.

Always check your client’s business credit before pursuing this strategy. Commercial credit checks help ensure that you work only with reliable clients.

Solution 2: Small business factoring

Offering early payment discounts and improving collections fixes many cash flow problems. These tactics are good, but they have some limitations. They work well if your cash flow problems are sporadic and not too serious.

If your company needs reliable cash flow, consider using small business factoring. This solution helps small and growing companies that have cash flow problems. It improves their financial position and provides a platform for growth.

How does factoring work?

Factoring improves your cash flow by financing your open invoices. The solution bridges the financial gap between delivery of services and payment, providing funds to pay expenses.

The process is simple and integrates well with most companies. After signing up with a factoring company, you submit the invoices from pre-approved clients to the factor. The factoring company verifies the invoices and finances them in two installments.

The first installment, called the advance, covers 80% to 90% of the invoice. The factor deposits the advance in your bank account after processing your invoices. The remaining 10% to 20%, less a factoring fee, is deposited once your client pays in full. The second installment settles the transaction. To learn more, read “What is factoring?

Cost of the service

In general, small business factoring lines can be more expensive than conventional factoring lines. This expense is due to their smaller size. Factors operate a volume business and provide discounts to larger accounts. The service costs between 2% and 3% per 30 days outstanding. Note that some smaller clients may have a higher cost than that. See the following link for more information on factoring rates.


Factoring lines have a number of advantages and few disadvantages. The most important benefit is that it can improve your company’s cash flow quickly. Additionally, factoring lines:

  1. Are easy to get
  2. Let you provide payment terms to clients
  3. Allow you to take on new clients
  4. Help you manage your customer’s credit
  5. Can be increased as needed

However, business owners should also keep in mind that factoring lines:

  • Are more expensive than lines of credit
  • Can be labor intensive
  • Require contact with your end-customer

Qualification requirements

Factoring is designed to help small businesses that are unable to obtain conventional financing. Consequently, the solution has relatively simple qualification requirements:

  • Your customers must have good commercial credit
  • Your accounts receivable can’t be encumbered by liens
  • Your profit margin must be above 15%

Get a factoring quote

We are a leading provider of small business factoring and can provide you with competitive terms. For more information, get a factoring quote or call us at (877) 300 3258.

Additional information

If you need more information about financing a small company, read: