Factoring, also known as accounts receivable financing, is one of the oldest methods of business financing in existence. The history of factoring dates back to the days of moneylenders in the middle ages, although some have claimed by that it goes back much further.
Simply put, factoring is the sale (at a discount) of accounts receivable, as opposed to borrowing against them as you would do with a bank line of credit. By selling your invoices, you generate immediate cash flow instead of having to wait for your customers to pay. Factoring is available in a wide variety of industries, from construction, to manufacturing, to the medical field, to retail, to technology, and many others.
Companies often find themselves in the frustrating position of having sales opportunities which they cannot accept because of the lack of financing to support those sales. In the current economic climate, banks often cannot provide adequate funding for growth due to internal credit policies and external regulatory restraints. Even if the business can qualify, the bank line of credit may not be sufficient to fully support the company’s growth opportunity.
The primary advantages of factoring versus a bank line of credit are as follows:
• Factoring facilities are easier to implement compared to acquiring a bank line of credit.
• Factors have more flexibility with regard to documentation and credit issues than banks.
• Factoring can be initiated and terminated very efficiently. When making a first-time purchase of invoices from a business, factors typically take one to two weeks to check the credit ratings of the customers and communicate a discount price.
• The business receives payment in cash from the factoring company after delivery and invoicing a customer. Immediate invoice payment circumvents the usual sale-to-collection business cycle, thereby enabling businesses caught in a cash crunch to obtain fast relief.
• As indicated, factoring is a sale of assets (invoices), not a loan, thus it has no impact on the company’s debt load. For businesses that either cannot qualify for traditional debt financing or simply do not want to incur more debt, factoring is an excellent alternative means of obtaining working capital.
• Factors purchase all rights in the invoices, and the seller has secondary liability for any invoices not collected. Thus in the short term at least, small business owners can concentrate on their operation instead of having to chase customers for payment.
The factors undertake debt collection, but the business remains ultimately responsible to repay any portion of the cash price attributable to an account that goes uncollected. Factoring can be an effective solution to funding a short term gap in cash flow for the start-up or rapidly growing business.
As with any financial vehicle, the business owner must carefully weigh the risks and benefits involved with factoring, in the context of the business’s current and future financial position. If you feel that factoring could be the right option for your business, feel free to contact us on (888) 748-7731 or firstname.lastname@example.org for more information.