Factor Your Receivables for More Cash

Having trouble getting a loan for your business? Considerfactoring your accounts receivable instead.

A factor works by providing a cash advance based on the totalvalue of the invoices that you provide as collateral. You typicallyreceive 80 percent of the invoice value upfront. Then you receivethe remaining value once the client pays the factor, minus afactoring fee. This fee can be structured in any number of ways,but it generally nets out to be about three to five percent of theinvoice value.

To quality for invoice factoring, your company must satisfy twobasic conditions. First, you should have no existing primary lienson your accounts receivable. Essentially, this means that no othercompany should have a claim on payments when they come in. This canmake it difficult for companies in certain industries likeconstruction to find a factoring company that will take theirinvoices.

Your customers must also be creditworthy. Factoring only workssuccessfully if clients pay their invoices. Your company'screditworthiness will not necessarily factor into a decision toapprove or deny your account. Instead, the factor will focus onevaluating your clients to determine whether and how quickly theywill pay their invoices.

There are many factoring companies ranging from small financialservice businesses to large banks. Not all will take your business,though. Some specialize in particular industries like manufacturingor medical. Others may require a certain minimum per invoice ortotal invoice amount before they will conduct business withyou.

Take the time to compare your options when choosing a factor.The pricing structure should be a critical point of comparison.Using likely customer payment scenarios, calculate what the totalfees will be for the different vendors. Deposit or applicationfees, the advance rate and monthly minimums should also beexplored. Finally, check whether a minimum length contract isrequired and, if so, what penalties are assessed if you breakit.

Definitely inquire about how the factor handles unpaid invoices.Some factors will assume all the risk and not require you to repaythe factor if the invoice is not paid within a set period of timein what is known as non-recourse factoring. On the other end,recourse factors will require repayment of funds plus thefactor's charges. Treading the middle ground are factors thatwill allow you to swap in other invoices for the non-payers.

Finally, put yourself in your customers' shoes and inquireabout what the invoice handling process will be like from theirperspective. Look for a company that is as focused on customer careas you are. You should know that many factoring companies adhere to"notification factoring" where it is clearly indicated onthe invoice that payment should go to the factor.

Getting paid in advance for your invoices, even with apercentage taken off the top, might be the right step for yourbusiness to take. In this new math, factoring your invoices canhelp your revenues multiply.