As Elton Allan's in home physical therapy company grew, so did his accounts receivables. Like so many businesses today, access to online business funding comes with few qualifications and a high price tag. "I was in a hurry to meet payroll and I found a fintech factor who made the online set-up very easy and promised funding the following day. I should have done my homework.
" What Elton did not know about this new form of funder was the rate was double what a traditional factor charges with none of the professional back-office support. "When I had a moment to look at what I signed up for and what I was getting, I was shocked. I had to look for another option." We quickly evaluated his situation and found that his cost savings would be dramatic, not to mention professional management of his receivables. "It was a no brainer to make the move to Gateway Commercial Finance; I wish I would have found them first!"
Elton faced a problem that nearly every growing business confronts at some point. Further growth requires funding, but funding is hard to come by if you’re a small business. That’s why so many small business owners turn to the world of factoring and online lending. Unfortunately, as Elton learned, many funding partners don’t meet the quality standards that one would expect.
Of course, when your business is in a cash crunch, you may not be thinking about asking questions and doing your due diligence. You need funding and you need it fast. You may need cash to pay vendor bills or cover employee salaries. Or you may need it to launch a new marketing campaign, or simply to float the business while you wait for invoices to get paid.
Faced with that kind of urgency, you may be willing to accept funding from whomever will offer it. The problem with that kind of approach is that you may accept funding from the wrong partner.
In the online lending world, it’s not unusual to face steep discount rates from the new “Fintech” factors that are buried deep in the contract’s fine print. You may find that the payments associated with the funding put you into an even deeper hole when it comes to cash flow.
Factoring is often an appealing alternative to online lending. However, due diligence is required with factoring partners too, as Elton can attest. Rates are obviously important with factoring. While it’s natural and understandable for the factor to charge a discount for their services, those rates shouldn’t be so excessive that they hurt your ability to maintain positive cash flow.
Another point to consider is the factor’s back-office support. Often, the back office can make or break the success of the factoring arrangement. You want this to be a seamless experience for your customers. Ideally, they wouldn’t know that their payments are going to a factor instead of you.
However, if the factor doesn’t have the back-office staff or processes needed, they may not be able to protect your relationships with your customers. You want a factor who uses discretion in any efforts to collect and who respects your client relationships as one of your most valuable assets.
Look for a professional, experienced traditional factoring company who has competitive rates but also has an efficient and well-developed back-office infrastructure.
Factoring can be a highly effective and efficient way to overcome cash flow struggles. However, choose your factoring partner carefully. You’re not just receiving funding. You’re also bringing a third-party into one of your business’s most important functions. Look for a factor who is experienced and knowledgeable, and who has the resources and processes necessary to serve you and your customers.