Factoring - A short-term business financing alternative

Occasionally a small business owner is caught between the proverbial rock and a hard place in regards to cash flow. Employees, vendors, suppliers and utilities must be paid, yet your customer’s have decided to delay paying your invoice until 30 - 60 - 90 days from now. Adding insult to injury, the bank cancels your line of credit and asks for repayment. As a small business owner, you may not have an accounts receivable department dedicated to collections. Usually, you or your bookkeeper review the A/R aging report and make calls when time permits. Do you have any options other than a cash infusion from your personal funds, another loan, contacting family and friends or even calling Lonnie, ‘The Nose’, to ask the local mob for a loan, perhaps at 10% a week?
Factoring your outstanding receivables might be a solution. A ‘factor’ will accept your receivables and advance you a percentage within two to five days. In essence, they become your accounts receivable department. They contact your customer requesting that payments be sent to their office. They may ‘qualify’ your clients, rejecting invoices from a client who is in poor financial condition. You get the funds to operate, your bills are paid and you can concentrate on generating sales and growing the business. Sounds great, doesn’t it.
Finding a factor is relatively easy, do a Google® search and several thousand hits will pop up. Selection is the challenge. Some things to consider: Do they know your industry? Can you get local references? How long have they been in business? What are the set-up and transaction fees? Do they have an on-line system that allows you to monitor the process? How will your customers react? Will your customer contracts allow you to factor invoices? What type of contract is required? Can you utilize their services on an as needed basis without multiple set-up fees? In other words, be wise and discuss this option with both your attorney and your accountant.
Finally, what is the cost for factoring? That depends, but here is an example. On Monday, you submit $20,000 worth of invoices from last week. The customers are dependable, with minimal possibility of not paying. On Wednesday, your bank receives a wire transfer deposit of $14,150, or 75% of the face value, less 3% for the factoring fee and a $250 set-up fee. At the end of 30 days, you receive another $2,000. At the end of 60 days, you receive another $2,000 and the return of a $1,000 invoice a customer has not paid.
For a young business, factoring invoices may be an option. More expensive than a working capital loan, but you receive operating funds now, without jumping through too many hoops. You can concentrate on growing your business, but with additional overhead. Can your pricing structure and competitive environment support this cost? You make the call.