Council Post: Alternative Business Funding: What Are Factoring Loans?

Amir Baluch is the founder of FinancialWellnessMD, which offers a range of financial educational materials for medical professionals. During my 20-plus years of operating companies in different industries, consulting with business owners, helping them get financed and making smart investments, I've found factoring loans have increasingly proven to be 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 consider how this funding can be used to strengthen and grow ventures and examine why it is becoming more appealing for parties on both sides of the table. Put simply, factoring loans are a type of financing in which businesses sell their accounts receivable, unpaid customer invoices or projected future cash flow for a quick injection of cash right away. There are several variations of this and ways the loans can be structured, but the principle remains the same.

For the borrower or seller, these loans can provide the chance to cover cash shortfalls from slow-paying or bankrupt customers, cover working capital needs between orders and delivery, boost hiring, expand into new channels and areas, scale marketing to grow the business and more. Some of the additional benefits may include not needing personal guarantees and limited paperwork; factoring loans are also a source of non-dilutive funding, which does not require giving up equity or control of the business to outside investors. For the funding entity, factoring loans offer an opportunity to provide financial support to entities with a proven track record of producing revenues and which have accounts receivable as assets. These are some of the spaces I've observed that may benefit the most from factoring loans in the months and years ahead. ReportLinker expects that number to rise to nearly $19 billion in the next four years. The continued explosion in e-commerce and recent supply chain challenges are only making it more vital that companies in this sector have access to more working capital. At the same time, it is no secret that collecting on billing can be a slow and arduous process for healthcare providers. 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 sourcing land through the construction process, to selling and banking their proceeds. I think this is likely just the tip of the iceberg as many of the largest corporations have begun major layoffs and hiring freezes. More individuals may have to go out on their own as entrepreneurs and set up their own businesses. They have all of the orders and promises of money coming in, but have to fund the building and delivery before getting paid. Some leverage is an advantage and can reduce risk in itself. However, overleveraging can increase risks--whether that is committing to regular payments, minimum repayments in a given time period, or giving up a percentage of future anticipated cash flows. Unexpected things like Covid-19 lockdowns can happen. If the money doesn't come in, then you may fall into default or be forced to make short-term decisions to stay afloat. Be sure that you use the proceeds to invest in things that will really pay off. It is always possible that businesses will default on debt or that there will be temporary cash flow issues, even if the odds are low. But things are changing. Businesses will always need money to survive and grow. Looking forward, at least until the economy rebounds again, the money may have to come from alternative sources. The good news is that this comes at a time when many investors are also looking for alternative ways to deploy their capital and generate strong returns and cash flow. This certainly applies to finance, too. Factoring loans can be a powerful and essential source of funds for businesses. Investors can also benefit from participating in this space as they seek alternatives for their portfolios. You should consult with a licensed professional for advice concerning your specific situation.