Financing any business can be a challenge, but stabilizing cash flow for a turnaround business is a whole other story. Whether you experienced a rough economic cycle, sector shift, supply chain disruption, or customer delay, it’s difficult to regain a strong footing. The path to full recovery requires liquidity, discipline, and flexibility. Unfortunately, access to traditional capital often recedes precisely when businesses need it most.

If you’re here, you may be a CEO or CFO who has experienced economic troubles and is looking for a way to turn things around. You may be a savvy business owner seeing troubles on the horizon, and wanting to get ahead of the curve. Either way, we’ll get straight to the point:

In our experience, accounts receivable factoring can be an excellent way to improve cash flow and reposition a business.

Factoring is a financial tool whereby a business sells its accounts receivable to a factoring company at a discount, in exchange for immediate cash. The factoring company then waits to receive payment from the customer in 30, 60, or 90 days.

The primary benefit of factoring is next-day cash flow. The business can use the influx of cash to stabilize and position for future success.

If you’d like to learn more about factoring and how this form of financing could benefit turnaround businesses, continue reading. But if you’ve read enough and would like to talk to a professional to see if it’s the right tool for you, let us know:

Understanding the Cash Flow Challenge in Turnarounds

If your business experienced a recent loss, a poor quarter, or is struggling to turn around, cash flow can be a challenge. Often, in these scenarios, traditional pools of capital dry up. Your bank line of credit may be called because of a breach of covenant. Investors may look into other options. Internal cash reserves may run out. This loss of capital only exacerbates the problem, leaving your business in more dire straits than before. Without cash, you can’t pay vendors or employees, which spells disaster for any business.

What Is Factoring?

As briefly mentioned above, factoring is a financial tool whereby a business sells its accounts receivable to a factor in exchange for immediate cash. It’s important to note that this is not a loan on AR, but the sale of AR. The factoring company purchases the receivables, and initially advances 80-90% of the receivables value. The factoring company, as the new owner of the receivable, waits for your customers to pay, holding the remaining 10-20% in reserve. Once your customer pays, the factoring company releases the reserve back to you, minus their processing fee. This fee generally falls between 1-6%. In the end, you receive 94-99% of your invoice’s value, exchanging a small percentage of revenue for the liquidity.

For more details about factoring, check out: What is Factoring?

Why Factoring works for Turnaround Financing

Accounts receivable factoring can be a great tool for turnaround businesses for several reasons. First, it provides another source of capital without bringing traditional debt. Factoring removes the time between product or service delivery and payment collection, granting access to the cash the business has already earned. This can be invaluable for turnaround businesses, financing operations and enabling stability.

Factoring as a source of financing for a turnaround business works particularly well because of the underwriting processes. With traditional lending, a bank will consider your past performance and credit history to determine whether you qualify for a loan. If you have a loss in previous years, the bank may turn you down. Factoring operates differently. Factoring companies may still consider your business’ credit, but the primary source of repayment isn’t your business—it’s your customers. Your customers are responsible for paying what you’ve invoiced them for (that is, they are responsible for paying down your accounts receivable). Therefore, a factoring company purchasing your invoices (accounts receivable) will consider the likelihood that your customers will pay and therefore will base their underwriting decision on your customer’s creditworthiness before considering your business’ creditworthiness.

Common Misconceptions About Factoring During Recovery

The distinctive in underwriting addressed above makes AR factoring a great option for turnaround businesses. In fact, factoring works so well in these scenarios that many believe factoring is only a last resort for turnaround or struggling companies. This misconception causes many to associate factoring companies with MCA lenders, payday lenders, or other predatory financiers. This is simply not the case. While it’s true that there are predatory factoring companies that will drive your company into the ground, many factoring companies are reputable and exist to support your business. A factoring company benefits most when its clients are growing and thriving. Some, like Flexent, are even bank owned and therefore governed by state and federal regulations. 

While it’s true that factoring often costs more than a line of credit, it’s important not to fall for the misconception that factoring is just an expensive loan. Categorically, factoring is not a loan. It is the sale of a financial asset (though GAAP encourages recourse factoring to be accounted for like a line of credit). As far as costs go, factoring can be compared to the costs of accepting credit cards. Sometimes factoring is even more cost effective. Additionally, costs will depend on the factoring company. Privately owned factors generally have a higher cost of funds compared with bank owned factors.

Factoring costs must be weighed against the benefits. The ability to get paid the day you invoice may allow you to take on larger customers. This then increases your revenue and stability. Since factoring allows businesses to collect what they’ve earned upfront, a business can focus on stabilizing operations, rather than chasing payments.

To learn more about myths surrounding factoring: 6 Factoring Myths

When Factoring Is the Right Fit for Turnaround Financing

Factoring works best when a business has strong accounts receivable for credible customers, and when leadership is committed to long-term stabilization. So long as these two exist, factoring can be an excellent financial tool for a turnaround business. 

If a business does not prioritize finding stable ground, factoring is likely not the answer. Additionally, factoring is not a fit if the company has no accounts receivable, or if receivables have already gone to collections. A business should use factoring as a tool to stabilize and thrive, not just to survive.

If you’re wondering if factoring could be a good fit for your business, take a minute to consider some questions below: