Silo: A Better Alternative to Accounts Receivable Factoring

A variety of viable financing options are available to help you better manage your business’ finances and secure an influx of cash to keep operations moving and growing. 

One option is accounts receivable factoring, the process whereby a factoring business gives you a money advance on a customer invoice in exchange for a fee. However, while this option may sound good on the surface, whether it’s actually the best option for your business is a different story.

This article will act as a learning guide to teach you about what accounts receivable factoring entails, the cost of it, and what other alternative lending funding structures exist to ensure strategic management and long-term success for your business. 

What is accounts receivable factoring?

When businesses are strapped for cash and are in need of money faster than customers can pay their bills, they might consider accounts receivable factoring. In practice, the business would sell at least one invoice to a lending company for an advance payment. In exchange for quick payment, businesses will have to pay a fee. 

Some view it as useful for bridging cash flow gaps, though this finance option is a more expensive method of lending. 

Plus, if a distributor cannot pay, it's common for factoring companies to go after a business’ customers. This is less than ideal, as it can cause reputational damage that prevents other businesses from wanting to work with them.

Regardless, accounts receivable factoring is not technically considered a loan. Although businesses that don’t traditionally qualify for bank loans based on poor or short credit history may opt for it (i.e., businesses that aren’t a large corporation), it’s generally seen by most businesses as a funding method that has many downsides.

How accounts receivable factoring works

Accounts receivable factoring is a financial transaction process where a factoring or lending business pays around 90% of the customer’s invoice in advance to the business (though sometimes this value amount is greater or lesser).

The business gets a quick influx of cash to cover an overdue expense or debt. On the flip side, the lender makes revenue from the fees paid to them for their service. Variable rates typically determine the fee and differ between factoring businesses.

Sometimes, a factoring business will require that you agree to recourse factoring, which holds you responsible for paying back the lender if the customer never pays. This agreement makes it so that interest rates are typically more affordable—however, you assume the risk, which can place your business in a precarious situation.

In cases with a non-recourse factoring structure in place, the factoring business assumes the risk, and thus, charges more interest to compensate. 

Is accounts receivable factoring the best option?

Oftentimes, no, accounts receivable factoring is not what’s considered the most optimal. While it may provide your business with temporary cash relief, there are some huge disadvantages of using the service that you need to know. 

First, it can be a very expensive business accounting process, where fees typically range from 1 to 5% each month. Also, if you agree to recourse factoring, you’ll be on the hook for a customer’s unpaid invoice.

Second, the fee structure is entirely dependent on the customer—the longer they wait to pay their invoice, the heftier fees you’ll be charged. This can make it difficult to make a payment plan and informed business decisions about the future.

Third, if you’re operating in an industry like the produce supply chain where healthy business partnerships are highly valued, having an external third party act as a collector can create the risk of straining your relationships. It means, to some extent, relinquishing control. 

In the worst case scenario, it can significantly damage your business’ reputation and cause long-term losses.

Alternative financing emerges as a solution

Traditional lending strategies and invoice factoring are not your only two options when your business needs working capital. Consider Silo Capital for your go-to alternative financing solution, particularly when your business hits a rough patch that increases your credit risk or prevents you from securing a line of credit or loan from a bank.

Instead of seeking help from a bank that requires collateral or forces you to commit to a rigid contract with strict obligations, you can rely on Silo to provide you with flexibility, security, cost-effectiveness, and a range of options that help you out of a bind.

Silo has partnered with small and medium-sized businesses like yours to inform our products. Large banks have dominated access to funding for far too long, giving businesses like yours no option but to pay outrageous fees tied to inflexible terms and conditions (fees best suited for a large corporation). Silo has since stepped in to provide distributors like you with a tailored financial product that gives you more purchasing power and control over your business. 

With Silo Capital, your small business doesn’t have to stress over customers paying their invoice. Silo Instant Pay allows your business to receive 90% of the invoice amount in only 3 days, and unlike other solutions, repayments are flexible.

The reason Silo works so well is that your business can maintain total control over customer communications, have 100% funding transparency, and have clear repayment schedules so your business can plan ahead. 

Silo Cash Advance encourages strategic investments to support your business operations. Don’t wait for a bank to approve a loan. Instead, invest in time-sensitive opportunities, diversify product lines, secure stable supplier relationships, and vertically integrate your business to promote lower costs or launch a rebrand.

With flexible funding options at hand, your business can bridge cash flow gaps so you can keep your business going and growing.

Book a demo with Silo today!