In the United States, more than 1 million small businesses open each year. 

These businesses cover the entire spectrum from restaurants to professional services. One thing that they all need is operating capital. You may have heard of factoring loans as a means by which some businesses maintain their operating capital. 

If you have, you may have wondered what a factoring loan is. A factoring loan definition can’t be explained until you understand what factoring is. A factoring loan is not the type of thing you get from a bank or lender.

 

Factoring Loan Definition

Factoring loans are not traditional loans. They don’t require collateral and you don’t need to go to a bank to receive one. Factoring is an area of business that many successful companies use in order to get quick injections of cash when it is needed.

 

What Is Factoring?

Factoring is the act of getting money for invoices that haven’t been paid yet. This type of funding is also known as invoice financing. In this arrangement, your business is given money for these invoices by a third-party company. 

Accounts receivable factoring financing helps by getting the money you need into your business fast. The invoices are then collected on and you pay a percentage of the overall invoice amount to the factoring company. That percentage is determined by your agreement with the factoring company. 

While a factoring loan is not a normal loan, you can use a bank to receive this cash. This is called bank factoring. Not all banks offer factoring. You will have to find a bank that specifically offers factoring as a business service. 

As you can see, a factoring loan definition has many aspects to it. Whichever route you choose, remember that you are going to need capital for your business to be successful.

 

Factoring and the Cost of Business

One thing all businesses owners understand is the cost of starting a business. The other thing that all business owners understand is that you need to keep your business moving. In order to keep the business moving, you need to have capital. 

Invoicing can lead to delays in receiving the money you may need. Businesses infer costs on a regular basis that may exceed their budgeted allowances. If this happens, you should consider a factoring service that can get you the money your business needs. 

This access to immediate cash for products and services already delivered means your business can be nimbler. The financial health of your business is less tied up in invoices that may not even be paid on time. You already have the money and collecting the invoice becomes the work of the factoring company.

 

How Factoring Can Help You

Should you wish to expand your business and need money in order to secure a bid for construction, you can use factoring to get that money. Instead of waiting for your cash flow to resolve normally, you are able to skip that step of business operation. 

You can use a factoring company to replace an invoicing department. This enables you to not only have the stress of collections taken care of, but also the cost of having a department dedicated to it. Removing this will lower your expenses and help make your business more profitable. 

Factoring companies do not take a large percentage of the invoice. Often you will receive a percentage upfront when they purchase the invoice. The rest of the money will come to you after they have collected, minus the fee they take. 

Another area in which factoring is of great assistance is inventory. If you are a business that manufactures or builds, you need to have material on hand. If you get a large job that requires more material than you have on hand, delays can be costly. 

Using a factoring service in this regard will help you get the money you need. You may have invoices out for jobs completed that could make the difference in starting on the large project or not. A factoring loan in this regard will help you start the project, finish it on time and satisfy your customer.

Your business goals can be reached efficiently with a factoring loan. If you need to expand your workforce after landing a large contract, you can get the money you need immediately. A factoring loan, in this case, can remove the need for a traditional business loan that will end up costing you more in the long run.

 

Boiling it Down

In order to boil it down to the easiest terms, a factoring loan definition can be explained like this: You get paid for the invoices you have out immediately. This rapid return of funds can then be used for whatever your business may need. 

If you are going to use a factoring service, you want to make sure that it isn’t the sole financial tool you are using. In order to best use the capital, you need to develop a strategy. If you need help developing that strategy, Strategic Capital can help put together a range of financial tools for you.

 

Being Successful in Business

By the time most businesses have been around for five years, 45% to 51% of them have failed. 

There is a variety of reasons that businesses fail, but one component that links them all is money. Having access to money when you need it, especially when you have already earned that money, is vital. 

Don’t join the statistics of failed businesses. Understanding the factoring loan definition means that you understand how it can help your business. Deploying every tool at your disposal will give you an advantage over your competition. 

If you need financial strategy and want to be a competitive, successful business, Strategic Capital can help. We can get the ball rolling on meeting your financial goals and needs so that you can continue growing a successful business. We have helped thousands of business owners, and we can help you.

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Strategic Capital | Headquartered in Kansas City, Strategic Capital has deployed over $220 Million to over 4,000 entrepreneurs to help them grow their businesses and achieve their dreams.