Facts of Factoring

Financing with Factoring

Some small businesses that need cash in a hurry. One way is to turn to receivables financing as a quick, dependable source of capital.

Receivables financing, also know as factoring, can be an effective way for a small business to boost cash flow without adding additional debt. To implement factoring, a small business sells its accounts receivable to a factor (third party). The factor advances to the business the value of the receivables — minus a fee — and then assumes the role of a collection agent for the business for the money your business is owed.

Who Uses Factoring

Factoring is not for all businesses. Generally you have to have a significant volume of accounts receivable for a factor to be interested in your request, typically at least $5,000 a month. This form of funding may be best for rapidly growing companies that are looking for a way to quickly fix cash flow problems. It is commonly used in various industries where the value of net-30 and net-60 receivables is needed to ramp up manufacturing and inventory. Factoring should be considered a form of short-term financing; it is not a fix to a longer-term cash need.

Your ability to utilize factoring also depends significantly on the credit worthiness of your customers and the age of your receivables. Factors will need to assess the financial stability of your customers. They want to remove as much of the risk as possible to allow the collecting of the receivables and get paid.

Advantages Of Factoring

Factoring receivables can help a cash-needy business in different ways:

Speed: Selling receivables allows you to get the cash sooner than having to collect the funds on your own. You can have your money in a week or two. If you have an existing relationship with a factor, you may be able to get your cash in a few days.

Lack of debt: It is a sale of assets and not a loan. Businesses that can not procure debt financing may find this preferable to getting a loan.

Simplified collections: The factor handles debt collection so your company does not have to worry about collecting on the receivables.

Disadvantages Of Factoring

Factoring also has its downside:

Cost: Can be costly. In general, you will receive only a portion of the value of receivables up front, with the remainder coming when customers pay their bills to the factor. Traditional loans will typically cost less than factoring.

Flexibility: You generally can not sell older or long-term receivables to a factor. Many factors will not consider invoices with longer than 90-day payment terms.