In the past, entrepreneurs rarely used factoring to raise money, because it was seen as a sign of financial instability. The early 1990s' credit crunch changed that, says Craig Sheinker, founder and president of New York City-based Quantum Corporate Funding Ltd. Now, selling your invoices and other financial obligations is becoming a more popular way to raise money.
"Factoring today is much different than it was 20 to 30 years ago," says Sheinker. "The stigma is removed, and now large companies and small firms all use factors."
Factoring isn't for everyone, however. "If you operate on a 5 percent profit margin or less, you shouldn't factor," advises Sheinker, because factors may charge up to 4 percent of the invoices they collect. But if you need short-term financing, your payroll fluctuates seasonally, or your company is growing too fast to wait for traditional financing, factoring may be for you.
What type of factor should you choose? Nonrecourse factors, like Quantum, will bear the financial exposure if your customers default. Maturity factors (a type of nonrecourse factor) will pay you on a specific date if your invoices aren't paid. Recourse factors, in contrast, require repayment in the event of a default. If you only need to factor a few invoices, spot factors offer greater flexibility at a higher cost.
As you search for a factor, don't shop by rates, cautions Sheinker. It's more important to find a good team with experience making creative deals to service your account.
For more information on finding a factor, contact the Commercial Finance Association at (212) 594-3490 or http://www.cfa.com