How To: Factor
Get money to grow! Here's a little-known financing tactic even start-ups can use.
When Buddy Pope needed working capital to grow his young company, Recon Services Inc., his banker suggested he sell some of his invoices to get cash quickly. Pope turned to Dallas-based American Receivable Corp. That was 19 years ago. Today, the Garland, Texas, entrepreneur still sells his accounts receivable each week even though his business, which reconditions steel for oil and chemical companies, has more than tripled in size.
Like Recon Services, many companies sell their products and services without getting paid in advance. But they need cash to pay their employees and suppliers, often before customers pay the invoices. One way to get that cash is to sell their accounts receivable to a third party, called a factor, which pays a percentage of the invoice (known as an advance rate), often within 24 hours.
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