Cash flow management is a critical challenge for small and medium enterprises (SMEs), especially when clients delay payments. Factoring has emerged as a practical solution to bridge this gap, offering businesses access to immediate funds while reducing risks. In this interview, Reelika Sõnitsar, CEO of smeGo Estonia, shares her insights on how factoring works, its advantages over traditional financing, and why it’s gaining popularity among SMEs.
Q: How does factoring help businesses address cash flow challenges?
A: Factoring is an excellent tool for businesses to manage liquidity and plan their cash flow. Here’s how it works: when a business has an outstanding invoice, they can assign the claim to a financing company like smeGo. We then finance 90% of the invoice amount in advance within one business day, allowing the business to access funds without waiting for the buyer to pay.
Typically, payment terms range from 7 to 180 days, with 30 or 60 days being the most common. Waiting for such extended periods can significantly strain a company’s operations, especially for businesses dependent on predictable cash flow. With factoring, this delay is eliminated, and businesses can focus on growth.
An added advantage is that factoring with smeGo includes credit insurance. This insurance covers 90% of the invoice value in case the buyer defaults or declares bankruptcy. Essentially, the entrepreneur only risks 10%, which is often equivalent to their profit margin. This safety net not only stabilizes cash flow but also reduces financial uncertainty.
For businesses exporting goods or offering services abroad, factoring provides an additional layer of security. In international trade, confidence in buyers is hard to establish. Factoring allows businesses to operate without worrying about delayed payments or default risks.
Q: Why should businesses consider factoring over traditional financing options?
A: Factoring stands out because it doesn’t require traditional forms of collateral like real estate or machinery. The invoice itself, backed by insurance, serves as collateral. This makes factoring accessible to companies that operate without tangible assets, a growing trend among modern businesses.
Many banks and traditional lenders hesitate to offer large loans without significant collateral. For SMEs that rent their premises, lease their equipment, or operate in asset-light industries, this can limit access to funding. In contrast, factoring is a viable and often the only financing option available.
Another advantage is the speed and simplicity of factoring. Unlike loans, which involve lengthy approval processes and significant paperwork, factoring agreements can be finalized in days. With smeGo, businesses can upload invoices via a self-service platform and receive funds almost immediately.
Q: What specific cash flow issues does factoring resolve for small businesses?
A: One of the primary benefits of factoring is predictability. Businesses know exactly when they’ll receive funds and at what cost. At smeGo, our standard rate is 1% per invoice if the payment term is 30 days. This flat rate simplifies planning and ensures transparency.
For example, if a business factors an invoice worth €10,000 with payment term 30 days, the cost is only €100. Such clarity enables businesses to calculate expenses accurately and decide whether factoring is a cost-effective solution.
Factoring also helps enforce payment discipline among buyers. When buyers know that invoices are factored, they are often more punctual with payments. This is because delayed payments could affect their credit standing and limit their access to financing in the future. For SMEs, this improved payment discipline is an indirect benefit of factoring.
Q: Do buyers know when a business uses factoring?
A: This depends on the type of factoring chosen. In traditional factoring, invoices include an assignment note, making it clear to the buyer that the claim has been transferred to a financing company. This is often viewed positively, as it indicates the supplier is proactively managing their cash flow.
However, there’s also blind factoring, where the buyer is unaware of the assignment. While some businesses prefer this option to avoid disclosure, the need for secrecy is diminishing. Buyers increasingly understand that factoring is a strategic tool, not a sign of financial distress.
In fact, factoring can improve the supplier-buyer relationship. Buyers benefit when their suppliers have stable cash flow, ensuring consistent quality and timely delivery of goods and services.
Q: How quickly can businesses access funds through smeGo?
A: The initial setup process, which includes application, agreement signing, and credit insurance approval, usually takes 3–4 days. Once everything is established, businesses can receive funds within hours of submitting an invoice.
The process is highly streamlined through our self-service platform. Businesses simply upload invoices, eliminating the need for repetitive paperwork or reapplication. Compared to banks, where financing can take weeks, smeGo’s factoring service is significantly faster.
The speed of approval also depends on the credit insurance company’s evaluation of buyer limits. For larger limits or buyers without up-to-date financials, approval may take slightly longer. However, our partnerships with multiple credit insurers ensure faster and more flexible evaluations.
Q: What sets smeGo apart from other factoring providers?
A: At smeGo, we focus on flexibility and accessibility. Unlike banks, we work with small businesses, including those with only one owner or limited turnover. We also offer the option to factor either single invoices or the full turnover, depending on the business’ needs.
Another key differentiator is our collaboration with three credit insurance companies in Estonia. Most banks work with just one or two insurers, limiting their options. By working with multiple insurers, smeGo increases the likelihood of obtaining the desired buyer limits, making our service more inclusive.
Additionally, we provide transparent pricing through a one-year agreement. This ensures that businesses can plan their finances without worrying about fluctuating costs. Predictable pricing and faster access to funds are core benefits of our service.
Q: Are there any misconceptions about factoring that businesses should be aware of?
A: One common misconception is that factoring is a sign of financial weakness. In reality, factoring is a strategic tool that helps businesses manage cash flow effectively. It’s a proactive step that demonstrates financial responsibility and forward-thinking.
Another misconception is that factoring is only suitable for large businesses or high-value invoices. At smeGo, we cater to small businesses and even single-owner companies. The size of the invoice doesn’t matter as long as there’s a clear claim against the buyer.
It’s also important to note that factoring only applies to completed transactions. Businesses can’t factor invoices for goods or services that haven’t been delivered. The claim must be clear and unconditional, as it serves as the collateral for financing.
Q: Any final thoughts on factoring and its benefits for SMEs?
A: Factoring is an incredibly efficient and accessible tool for businesses looking to grow. It allows entrepreneurs to focus on what they do best without worrying about delayed payments or financial risks.
At smeGo, we aim to make factoring as straightforward as possible. Our approach is centered on simplicity, transparency, and customer support. Whether it’s through our self-service platform, our partnerships with multiple insurers, or our flexible options, we strive to provide SMEs with the tools they need to succeed.
In today’s fast-paced business environment, factoring is no longer just a financing option—it’s a strategic advantage.
