There is an under-utilized and often misunderstood form of commercial financing available to business owners called
“factoring”. This type of financing can help a company smooth out their cash availability without creating a net liability on their financial condition. Although the factoring industry handles 80 billion dollars of business every year, business owners are still unsure about using it as a tool.
Whenever a company offers net terms on a sale to their customer, they are in a sense lending that customer money until the invoice has been paid. What a factoring company does is purchase the obligation of the debtor (customer) in order for the company to receive funds at the same time as the invoice is produced. This allows the company to go after larger accounts while knowing that they can get paid upon delivery of a product or service. An example of this would be a consulting company that lands a large account and has to bring on additional staff to handle the workload. Can the company afford to pay the growing staff while waiting for the customer to pay their invoices? Or a manufacturer of a widget that gets a large order. Can they fulfill the order and meet their everyday cash needs?
The process of factoring accounts receivables can vary in many ways. The administration of funding invoices can differ with different finance companies. Also the rate of funds in use can change based on variables of the deal like the dollar volume that will be financed and the length of time the company will be using the factor. The creditworthiness and number of customers will also play a part in determining how the deal gets structured.
Article Copyright 2001 Gary Honig, Creative Capital Associates.