Alternative Business Finance: What Are Factor Loans?

Amir Baluch is the founder of FinancialWellnessMDwhich offers a range of financial educational materials for medical professionals.

As the economy continues to develop, factoring loans are becoming an essential lifeline and growth tool for some business owners. During more than 20 years of managing businesses in various industries, consulting with business owners, helping them with financing and making smart investments, I’ve noticed that factoring loans are proving to be increasingly attractive options for both investors and recipients. of these funds.

As markets change, certain industries may benefit more from this type of financing. Let’s take a look at how this funding can be used to strengthen and grow businesses and explore why it becomes more attractive to parties on both sides of the table.

Benefits of Factor Loans

Simply put, factoring loans are a form of financing where companies sell their accounts receivable, unpaid customer invoices, or projected future cash flow for a quick injection of cash. There are different variations on this and ways the loans can be structured, but the principle remains the same.

For the borrower or seller, these loans can provide the opportunity to cover cash shortfalls of slow-paying or bankrupt customers, cover working capital needs between orders and delivery, boost hiring, expand into new channels and territories, scale to grow the business and more. Some of the added benefits include no need for personal guarantees and limited paperwork; factoring loans are also a source of non-dilutive financing, requiring no equity or control of the company to be given up to outside investors.

For the financing entity, factoring loans provide an opportunity to provide financial assistance to entities with a proven track record of generating revenue and that have accounts receivable as assets.

Five industries ripe for using factoring loans

These are some of the spaces I’ve observed that could benefit the most from loan factoring in the coming months and years.

1. Freight and logistics

The global freight and logistics industry is worth looking into nearly $16 billion. ReportLinker expects this number to rise to nearly $19 billion over the next four years. The continued explosion of e-commerce and recent supply chain challenges make it even more important for companies in this sector to have access to more working capital.

2. Healthcare

The healthcare industry has been forced to make huge changes and investments to adapt to the pandemic and our new virtual environment. At the same time, it’s no secret that collecting bills can be a slow and tedious process for healthcare providers.

3. Construction

While the real estate market is facing its fair share of challenges, construction is unlikely to stop anytime soon. New buildings are needed for healthcare, logistics, warehousing for e-commerce and facilitating the last mile, and to provide safe new housing for a growing population. Construction companies can face long payment cycles, from purchasing land through the construction process to selling and banking their proceeds.

4. Production

Whether building facilities, financing equipment, or filling the cash flow gaps between orders and receiving payment on delivery or on terms, manufacturers must have a financial lifeline that doesn’t slow them down or eat too much of their profits .

5. Service Providers

I’ve noticed an explosion of service providers in the wake of the pandemic, especially online. I think this is probably just the tip of the iceberg, as many of the largest companies have started with major layoffs and hiring freezes. Possibly more individuals will have to stand on their own two feet as entrepreneurs and set up their own businesses.

Whether they work in consulting, marketing, accounting, legal or SaaS, these business leaders will soon find that their best sales month is the one most likely to go out of business. They have all the orders and promises of money coming in, but they have to build and finance the delivery before they get paid.

Disadvantages and risks

As with any form of financing or debt, entrepreneurs need to be smart. Some leverage is an advantage and in itself can reduce risk. However, excessive leverage can increase risk, whether that means requiring regular payments, minimum repayments in a given period, or specifying a percentage of future expected cash flows. Unexpected things like Covid-19 lockdowns can happen. If the money doesn’t come in, you may default or be forced to make short-term decisions to stay afloat. Make sure you use the proceeds to invest in things that actually pay off.

Investors financing companies should look at risk-based returns, the underlying collateral and strategies to diversify portfolios to minimize downside and create reliable performance. It’s always possible for companies to default on their debts or have temporary cash flow problems, even if the odds are slim.

The need for alternative business financing

Factoring is not a brand new concept, although business leaders have often overlooked it. But things change. Businesses will always need money to survive and grow. Looking ahead, at least until the economy picks up again, money may have to come from alternative sources. The good news is that this comes at a time when many investors are also looking alternative ways to deploy their capital and generate strong returns and cash flow.

The economy and the DNA of the business world are changing. This certainly also applies to finances. Factoring loans can be a powerful and essential source of financing for businesses. Investors can also benefit from joining this space if they are looking for alternatives for their portfolios.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.

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