How Factoring Companies Help SMEs During Economic Uncertainty

While optimism is increasing among Canadian SMEs, concerns about rising inflation and costs remain widespread, according to the latest Survey on Business Conditions, as reported by Statistics Canada. Most businesses expect to face obstacles related to the economy, and nearly nine in ten say profits will flatline or decline. Although there’s no single solution to the issues, factoring companies are known for supporting SMEs during economic uncertainty and can help with many associated problems.

How an Uncertain Economy Impacts Small Businesses

An uncertain economy may impact small businesses in unique ways. Below, we’ll explore some common examples.

Consumer Behaviour Shifts

Shifts in consumer behaviour are not universal. For instance, businesses that rely on discretionary spending, such as the entertainment industry, often see a drop in sales. Customers may stop purchasing or pivot to less expensive options depending on the business. Businesses that fill genuine needs, such as food manufacturers, may not experience these issues or experience them to a lesser degree.

Revenue Reduces

As sales drop, revenue declines. Again, the degree to which a business is impacted will usually hinge on perceived need, though some luxury brands can slip through unscathed.

Cash Flow Slows

Both B2B and B2C businesses tend to experience slower cash flow. With B2B businesses, it’s because their clients are coping with the same challenges they are – reduced revenue and cash flow. With B2C businesses, it’s often because consumer spending drops.

Supply Chain Issues Emerge

Shifts in consumer behaviour and financial challenges for suppliers often create supply chain issues, which may make it impossible for businesses to continue providing goods and services as usual.

Risk of Bad Debt Increases

Slow cash flow and decreased revenue are warning signs that customers are struggling financially in an uncertain economy. As it progresses, many become unable to pay their bills altogether, resulting in a surge in bad debt for businesses.

Expenses Increase

Many suppliers begin increasing their rates to cope with lower sales and supply chain issues, further straining small businesses. Meanwhile, the government increases interest rates to help slow inflation, increasing borrowing costs.

Access to Traditional Funding Sources Dries Up

Banks become wary of lending as the risk of non-payment increases. To minimize their risk, they increase requirements to borrow, such as requiring higher credit scores and lower debt ratios.

High-Interest Debt Increases

Without access to traditional funding sources at a critical time, small businesses turn to high-interest financial tools. Over the past few months, credit card balances have grown by 15 percent, according to Equifax. Usage of lines of credit has increased by 11 percent, too.

While these can be beneficial for short-term needs, they often trap businesses in a cycle of debt. They’re only able to pay off interest charges and carry the balance month-to-month, which unfortunately becomes too much to bear for many.

How Factoring Companies Aid Businesses During Economic Uncertainty

If you’re experiencing any of the issues outlined above, the benefits of small business factoring may provide the relief you’re looking for.

Cash Flow Accelerates

Invoice factoring isn’t a loan. You receive the money you’ve already earned immediately by selling your unpaid B2B invoices at a discount to a factoring company. Because of this, you’re no longer stuck waiting on your usual 30-day or longer payment cycles or held back by slow-paying clients. Your factoring company sends you up to 90 percent of the invoice’s value upfront and then waits for payment from your client. When your client pays, the factor sends you the remaining balance minus a small factoring fee.

You Gain Access to Affordable Funding with Easier Approval

A typical factoring fee is usually between one and five percent of an invoice’s value, which makes it more affordable than many funding solutions. Plus, most businesses qualify for invoice factoring, regardless of credit score or debt levels. This is because your client’s creditworthiness is weighed more heavily than yours. Larger businesses aren’t impacted to the same degree as small businesses when the economy shifts, so it’s still easy to get approved.

You Can Apply Funding Where it Matters Most

Some funding solutions place limitations on how you can spend the cash. With factoring, it’s up to you. Use it to cover payroll, buy supplies, purchase and maintain equipment, or anything else your business needs.

Risk of Bad Debt Reduces

One of the unique benefits of small business factoring is that your factor will run client credit checks before factoring any invoices. That way, you know how much credit you can safely extend to any client and can make informed decisions that reduce your risk of bad debt.

Debt Reduces and Credit Improves

There’s no debt for your business to pay off with factoring. The balance is cleared when your client pays their invoice. That means you can’t get caught in a debt trap like you might with loans or lines of credit. You may also see improvements in areas that impact your business credit score. For instance, your ability to make timely debt payments will likely increase, and your debt ratio will be lower.

You Can Tap into Additional Back-Office Support

Factoring companies offer various services to help you save money or focus more on your daily activities. For instance, most provide collections services, while some provide invoice preparation. You may receive additional perks if you’re working with a factor that specializes in your industry. Factors that serve the trucking industry, for example, sometimes provide fuel discount cards and fuel advances.

Your Relationships Improve

Relationships with vendors and clients become strained when financial challenges come into play. Invoice factoring helps eliminate them by making it easier to pay your vendors on time and allowing you to give your clients the breathing room they need to pay their bills. This can help you win their loyalty for life and even help you attract more new customers.

Find Your Ideal Factoring Partner

If you’re interested in exploring factoring assistance for SMEs in uncertain times, finding a factoring company that fits your needs is essential. At Factoring Companies Canada, we’re happy to match you with a partner specializing in your industry and offering competitive rates so you can confidently move forward. Request a complimentary rate quote to get started.