Would you like a form of financing that doesn’t require going into debt or giving up ownership or control of your business; one that is fast and simple, is readily available even if your business is new or has no collateral, and grows as fast as your sales? This miracle financing is called factoring.
How it works:
You provide a product or service to a business or government agency and issue an invoice. For immediate use of most of that money, you would sell the invoice to a factor.
Before the factor buys an invoice he will verify that the customer has the means to pay and that the customer received the product or service, is satisfied, and plans to pay.
The factor pays you in two parts. He immediately pays an advance, a percentage of the invoice face value. Then he waits to be paid. When the customer pays him, the factor deducts his fees and refunds the balance to you.
Benefits:
Factoring is quick. After the relationship is established, funding is usually within 48 hours. You can then do business you would otherwise have to turn away, and take advantage of trade and material discounts.
Factoring is available. With most factors, your company does not have to have a minimum track record or good credit. They are usually more concerned with your customer’s credit than with yours.
Factoring is simpler and easier than applying for a loan.
Factoring is a sale, there is no debt incurred. This improves your company’s net worth.
You don’t give up ownership or control of your company.
Factoring is the only form of finance that grows with sales. As you issue more invoices, more cash is immediately available.
Factoring is flexible. Factors can be very flexible when dealing with problems. Prior liens are not necessarily deal breakers, so long as they are disclosed up front.
Factors keep track of accounts receivable and collections. This can save a lot of time and money for a small business.
Factors provide quality assurance. A factor gauges customer satisfaction with the product or service, which can help you better meet your customer’s needs.
Cost/Benefit Ratio:
Factoring offers a better combination of availability, speed, flexibility and services than any other form of financing. It creates opportunities for a level of growth that is not otherwise possible. Also, factoring is less expensive than offering net 30 days, with a 2% discount for 10 days or less.
The final word on the cost of factoring is: it depends. It depends on the customer and their credit, on the volume of the invoices, and on how long the invoice remains open.
Each deal is unique and fees and advances can vary quite a bit. The benefits of factoring should more than offset the cost. The most important thing for your business is whether or not you get to keep more money by factoring than you would have by not factoring.
Other things to consider:
Banks and factors are not competitors; they each do things that the other can’t. It’s not unusual for them to refer business to each other as the needs of the client change.
Factors come in all sizes and flavors. Some won’t touch deals of less than $100,000 per month; some won’t do more than $50,000 per month. Some won’t buy construction, medical or perishables invoices.
Factoring has been around for centuries. In the last decade it has become much more popular and competitive as the number of funding sources has increased dramatically. Rates are down and terms are generally better.
A cash flow consultant has access to a large number of funding sources, and will make the best match between a funding source and your needs. The factor pays the consultant’s fees, because for them it’s less expensive and more productive than advertising. To see if factoring makes sense for your business, contact a cash flow consultant.
Mike Curtin is a cash flow consultant and owner of MSC Funding. He has access to over 150 different funding sources, and can arrange the purchase of invoices and other cash flows. He welcomes your questions or comments and can be reached at (916) 283-4235, or at mscfunding@aol.com.