Entrepreneur magazine, May 1997
Business is great, orders are pouring in, but you lack the cash
to meet the demand and you can't get a loan because you
haven't been in business long enough or don't have
collateral. Your solution? Factoring.
One of the oldest forms of business financing,
factoring--selling accounts receivable to a third-party funding
source for cash--is the cash-management tool of choice for many
companies.
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In a typical factoring arrangement, the client (you) makes a
sale, delivers the product or service and generates an invoice. The
factor (the funding source) buys the right to collect on that
invoice by agreeing to pay you the invoice's face value less a
discount--typically 2 percent to 6 percent. The factor pays 75
percent to 80 percent of the face value immediately and forwards
the remainder (less the discount) when your customer pays.
Because factors extend credit not to their clients but to their
clients' customers, they are more concerned about the
customers' ability to pay than the client's financial
status. That means a company with creditworthy customers may be
able to factor even if it can't qualify for a loan.
Once used mostly by large corporations, factoring is becoming
more widespread. Still, plenty of misperceptions about factoring
remain.
Factoring is not a loan; it does not create a liability on the
balance sheet or encumber assets. It is the sale of an asset--in
this case, the invoice. And while factoring is considered one of
the most expensive forms of financing, that's not always true.
Yes, when you compare the discount rate factors charge against the
interest rate banks charge, factoring costs more. But if you
can't qualify for a loan, it doesn't matter what the
interest rate is. Factors also provide services banks do not: They
typically take over a significant portion of the accounting work
for their clients, help with credit checks, and generate financial
reports to let you know where you stand.
The idea that factoring is a last-ditch effort by companies
about to go under is another misperception. Walt Plant, regional
manager with Altres Financial, a national factoring firm based in
Salt Lake City, says the opposite is true: "Most of the
businesses we deal with are very much in an upward cycle, going
through extremely rapid growth."
Plant says you may be a candidate for factoring if your company
regularly generates commercial invoices and you could benefit from
reducing the time receivables are outstanding. Factoring may
provide the cash you need to fund growth or to take advantage of
early-payment discounts suppliers offer.
Factoring is a short-term solution; most companies factor for
two years or less. Plant says the factor's role is to help
clients make the transition to traditional financing.
Factors are listed in the telephone directory and often
advertise in industry trade publications. Your banker may be able
to refer you to a factor. Shop around for someone who understands
your industry, can customize a service package for you, and has the
financial resources you need.
Contact Sources
Altres Financial, (800) 531-0137, fax: (800)
390-1242