The process called factoring dates back hundreds of years, but it has evolved into a modern financing technique. What is factoring? When Business A sells a product or service to Business B, it sends Business B an invoice in order to collect the money due. Business A can then either wait for the invoice to be paid (eventually) or it can sell the invoice to a third party for a slightly reduced amount. The latter transaction is called factoring.
Factoring allows your company to get paid immediately, so you can service more clients, grow your business and increase your profits. Selling your accounts receivable will allow you to:
Increase your capital and stimulate cash flow.
Increase your purchasing power, enabling you to do more business.
Obtain the cash you need to meet your obligations, which will improve your credit rating.
Eliminate the need to use equipment, real estate or inventory as collateral.
Rely on the strength of your customers, not your company’s balance sheet.
Use what you have on hand to expand without going into debt.
Avoid costly bank loan charges.
Sell only the invoices necessary to cover the funds you need now.
In addition, the company buying the accounts receivable takes on the responsibility of checking the credit of your customers, and if there is a problem with late payment or collections, it is their problem, not yours. You get your money immediately, regardless of the length of time it takes for the invoice to be paid. This can not only improve your cash flow, but also save you the cost of paying an in-house person to handle collections.
In many situations, selling your invoices is more appropriate than bank financing, especially if you have not been operating a long time or have insufficient hard assets to put up for collateral. You can get the cash you need based solely on the accounts receivable, not on traditional measures of financial strength and stability. In addition, there is no ceiling, as there would be with a loan – the more sales a business makes, the more cash it can draw. Factoring provides continuing cash flow without worrying about periodic payments, interim payoffs, due dates or loan application forms.
Bank loans may also require a decision by a loan board. It may take precious time to get the decision of the board, and the outcome is often unpredictable and based on considerations that usually have more to do with your company’s past record than with its future potential.
Some companies in a growth mode may turn to venture capitalists to provide the cash flow they need to buy new equipment, hire more employees or build up their inventory. By selling the invoices generated by increased sales, you can get the cash flow you need without going to venture capitalists, who receive an interest in your business and may then have a say in how it is run. You stay in control of your company.
Ask yourself the following question: Are you in a financial position to take advantage of any opportunity that comes your way? You may find out that a competitor is looking for someone to buy out his company. You may be offered an important contract that will require you to buy more supplies and inventory and hire more people, but it offers the chance of a big payoff in six months. Do you have the cash to take your company to the next level?
When considering cash flow options, it will be worth your while to consider factoring. In fact, your company’s future may depend on it.