Factoring: what is it about?

You’ve heard the term “FACTORING”, but what is it all about?

Factoring is used by companies that have invoices (typically 30-60-90 or even 120 days outstanding) owed by their customers.

These companies are waiting to get paid, which sometimes hinders their growth because they can’t afford to start a new project until they get paid.

They have exhausted their working capital buying materials or paying payroll and general operating expenses to be able to complete their clients’ jobs.

They need money to start new jobs.

But they’ve also exhausted all the typical sources of loans: They even asked Uncle Bob and he said “NO MORE.” They’ve tried the local bank, even an SBA loan, but they’ve all been turned down. Credit card companies have you on “Hold” because you missed the last payment. There is hope!

They know they can pay: they even have several wing jobs waiting to start.

What about accounts receivable? If only the last two projects completed paid the $50K due, and oh yeah, what about the bill that was 45 days past due, the $75K one? He is also waiting to be paid, so he can pay. The money is coming but it takes time.

Where does business go?

Factoring, this is a perfect time to use Factoring. Factoring is selling invoices to a factoring company to get paid sooner.

You are selling an asset: it is not a loan. But, it’s more than just an asset sale, it’s like outsourcing your accounts receivable department. Factoring is based on your customer’s credit, not yours. You can factor even if you’ve fallen behind on payments or lost money, even if you file for bankruptcy. Factoring companies provide valuable services. They check your client’s credit for you (A D&B BUSINESS REPORT, NOT A TRADITIONAL CREDIT REPORT) notifying you of serious risks and providing you with detailed monthly statements.

Once you have decided which invoices you would like to sell to the factoring company, fax the invoices to the factoring company along with an accounts receivable aging report. The invoices are verified and the Factoring Company gives you 60-70% of your invoices in a week. You pay a small discount fee up front and once the factoring company collects your invoices, they return the remaining 30-40% minus your discount, depending on how long they hold them. But remember, they have a professional collection company that collects for you, so they will usually get paid sooner than you would.

There are no personal guarantees, no recourse even if the account does not pay. Any business can consider it, no matter what your FICO score or length of time in business. There are no arbitrary decisions of the loan board. As your business grows and your accounts receivable grow, the financing will increase.
You remain in full control of your business; this reduces business costs associated with the collection process. You also gain more control over your cash flow by deciding exactly how many invoices to sell and when. Your business will prosper because you are not thinking about cash flow problems and start spending more time on your business.

So what is it about? It means you can win the battle of slow paying customers, you no longer have to hassle your customers for money, paying your payroll, paying payroll taxes, getting discounts on your materials, buying in bulk or taking advantage of discounts offered. if you pay before Over time, this will improve your credit rating, as you’ll continually have cash on hand to pay bills on time.