Factoring is an effective business-to-business transaction that allows a small business to get the necessary loan when working capital is tied up in equipment, unpaid invoices or accounts receivable. Normally, a factoring loan is issued to clients who have a strong track record and/or a solid balance sheet. A typical factoring situation would be where the company granting the loan would lend a percentage of the value of the invoices, usually 70-80%, and then the debt would be satisfied in full when invoices are paid. The lender covers the cost of the raw materials for the manufacturer. Also, the lender assumes the risk of collection for payment and the manufacturing of goods. In some cases, the supplier of the raw materials will guarantee the delivery of the raw materials by acting as the third-party lender. This is a very common method of financing a small business. Another alternative, cash-flow factoring, is where an upfront fee would be charged—2% to 4% for 30-day invoices, and 3% to 6% for 60-day invoices.

Example. A clothing retailer needs a short-term inventory loan to purchase a shipment of spring wear for the upcoming season. With 60% of the clothing already sold online, a factoring loan would be issued to purchase all necessary inventories. All invoices would be factored, and the debt would be paid off in 30 to 60 days. This solution would allow for all orders to be filled in a timely manner and would ensure sustainability through the seasonal transition.

            Some of the deciding factors for a typical bank loan would be the company’s cash flow, profitability, equity, and years in business. This can mean crisis for many smaller businesses or ones that have only been operating for a few years. In comparison, a factoring loan is granted on the basis of the strength of a company’s client base and/or its accounts receivable.

EQUIPMENT FINANCING

            Another common reason for getting a small business loan is equipment financing. Equipment financing is borrowing to purchase machinery or equipment, while using that equipment as collateral. Think of it as you would buying a new car: you apply for financing for the car, usually without any collateral. Instead, the car itself is used as collateral. In that way, the loan is secured with a tangible item requiring less personal risk to you, because you don't have to use any of your belongings as collateral. However, it also means that the car can be repossessed should you fail to make payments.

            The same is true of equipment financing. For instance, let's say that your small business is in need of a printing press. You apply for business financing for the machine, and the machine itself is used as collateral on the loan. Again, this means that you don't have to put anything you already have at risk (other than your business credit rating) and the loan is secured by the printing press itself.

            Often, small business owners don’t realize that equipment financing is what they really need. Buying tools to do a job, or a service, is all that the business owner requires. Equipment financing loans are overall lower in interest rates and are preferred by StrongBusinessCredit above all other methods of financing. The sheer simplicity and the clean-cut approach allow quick turnaround and lower default rates. It’s often difficult to recognize just how useful this kind of loan can be.

http://www.24-7pressrelease.com/press-release/no-loans-when-you-need-them-96395.php Ilya Bodner
Small Business Owner
Initial Underwriting Group