How to keep your small business afloat with factoring

How to keep your small business afloat with factoring


How to keep your small business afloat with factoring In South Africa, experts predict that SMEs will provide 90% of all new jobs by 2030. As the owner or financial director of a small business, you may be wondering how you will ever get to the point where you’ll be able to hire more staff – staying in business is challenge enough!

Starting a business and keeping it going is no simple task. Research indicates that 70% to 80% of small businesses in South Africa fail within the first five years.

Why is this happening?

There are many reasons why businesses collapse. They may lack clear business plans or fail to market their solutions effectively. Perhaps they are under-resourced or struggle to maintain a competitive edge in a challenging commercial environment.

Many businesses fail because they cannot manage cash flow. A cash flow crunch can cause knock-on effects such as not paying suppliers on time and landing up with bad credit record. Starved of cash, operations slow down, reducing production. Managing expenses, as well as tracking when customers are due for payments, can be a challenge – and a distraction from keeping the business running.

How can factoring help?

Factoring empowers companies to manage their cash flows better, by unlocking working capital that is tied up in outstanding debtor balances. It works as follows:

  • A business sells its accounts receivable to a factoring company
  • The factoring company provides the business with around 75% of the invoice amount upfront
  • The factoring company then manages debtor administration and credit control on the business’s behalf
  • Once the business’s customers have paid the invoices in full, the factoring firm provides the business with the outstanding balance, minus an agreed admin fee

Factoring allows businesses to grow without having to sacrifice equity or control.

Factoring vs. bank finance

Unlike traditional bank loans where accessing working capital can involve lots of paperwork and long waiting periods, factoring is more flexible.

If you have a history of bad credit, even if this has been resolved, your request for finance from a bank could be denied. Factoring agreements, on the other hand, focus on the quality of your customer’s credit rather than your company’s credit score. This means that any issues with your own credit record will not necessarily affect your chances of factoring your invoices.

Factoring companies also provide services and support that traditional funders like banks do not. They typically provide ongoing access to account managers who are experts on your business cash flow and who will help you make effective financing decisions. They take over a significant portion of your administrative work, providing services such as:

  • Evaluating your clients' creditworthiness
  • Sending monthly statements
  • Phoning debtors for payments due
  • Sending reminders and final demands
  • Handling receipting and reconciliations
  • Liaising with attorneys if it becomes necessary to institute legal action

What are the benefits for you?

All this enables your business to make better credit decisions without having to worry about the staffing of these functions – or the overheads associated with the collection process. You are now able to spend time and money growing your business instead.

Having cash on hand enables you to:

  • Purchase new equipment, stock or materials
  • Negotiate better deals with your suppliers, such as bulk purchasing discounts
  • Accept larger projects or orders
  • Offer incentives to new customers
  • Focus on other areas of your business such as improving product quality
  • Invest in technology
  • Hire personnel with the right skills
  • Reinvest profits to build a better and stronger company with a competitive edge

Factoring is also a source of financing that grows with your turnover. As sales increase, more cash becomes available for you to use, which allows you meet demand constantly.

Why partner with Merchant Factors?

Merchant Factors has been providing factoring solutions to businesses in South Africa and beyond for 30 years. The firm specialises in providing organisations with an innovative and flexible alternative to bank finance, while supporting them with expert credit control and debtor administration services.

With Merchant Factors as your factoring partner, you can free up working capital to meet all your business needs – and you can do this quickly, as Merchant Factors offers the shortest turnaround time from application to pay-out in the industry.

For fast, flexible finance that’s aligned with your business goals – contact Merchant Factors today

Finance beyond the Numbers.