The overall increase in factoring volume is mainly attributed to the credit crunch in the late 80s.  As the availability of bank commercial credit tightens, more businesses look towards alternative sources of financing to achieve growth. 

Factoring companies can help those firms that banks often find difficult to approve such as start-up companies whose growth outstrips cash.  The primary focus in an accounts receivable factoring relationship is the credit-worthiness of the customers being invoiced and the client’s ability to produce a quality product or service.   Simply put, if the business has an acceptable product or service that it provides to a creditworthy customer then the business is a candidate for factoring.

The fact is that most companies share a common dilemma during periods of rapid growth of incoming orders draining cash flow.  Receivable Factoring not only provides immediate cash but, efficient businesses also use it as a tool to increase profit margins:

1.    Take Advantage of Early Payment  Discounts - Having access to cash enables businesses to save on average 2% by taking advantage of early payment terms offered by suppliers.  The points saved by reducing raw materials costs helps to offset the factoring fee. 

2.    Take Advantage of Volume Discounts - Having cash also enables businesses to buy raw materials in greater volume.  This saves money and directly impacts the bottom line.

3.    Reduce Late Payment Penalties and Interest Charges - Having immediate cash on hand to pay current obligations as they become due eliminates late charges from suppliers and other creditors. 

4.    Meet Obligations on Time - Paying vendors on time helps to establish a solid credit track record and allows for increased future credit limits from vendors as well as financial institutions.

5.    Offer Credit Terms to Customers - Offering credit terms to customers is a common way to increase sales by making it “easier” for customers to buy.  Having financial backing to carry accounts receivable is essential if a business wants to be able to follow through on its commitments.  Reputable factoring companies encourage “managed” growth by consulting with clients regarding exposures and other risks when taking on new credit accounts.

The difference between invoice factoring and other sources of financing is that the factoring company actually purchases and tracks commercial invoices.  In addition to providing immediate cash on invoices, the factor performs valuable credit analysis on new and existing customers and conducts professional, routine follow up on invoices as they become due.  

For the business manager who spends a good portion of the day collecting, bookkeeping and searching for capital, the entire factoring package offers peace of mind.  The manager can actually focus on important aspects of the business that are often pushed aside, such as marketing and production.

Depending on the agreement, businesses can pick and choose which invoices they wish to sell to the factor, who immediately advances eighty percent or more of the face value of the invoices.  The balance of the funds, less the discount fee, is released once the invoice is collected.  

The cost of doing business with a factoring company is the discount taken on the invoices submitted for funding.  Fees range from 1 to 5 percent, depending on volume, credit-worthiness of the customers sold and overall risk.  The discount taken is best compared to a merchant accepting a Visa or MasterCard transaction and receiving immediate payment, less a percentage or discount, before the actual cardholder has paid his or her monthly statement. 

Setting up a receivable factoring relationship is quick and easy in comparison to other forms of financing.  Applications simply call for basic company information and a customer list.  Years of profitability are not required which makes account receivable factoring an option for startups generating receivables.  It is possible that funding can occur in as little as a couple of days after the receipt of the application and invoices.

Each factoring company operates slightly different.  It is important to understand which programs  provide the greatest benefits and at the least cost. Several criteria should be addressed  when searching for a reputable factor.   Are there setup fees, maintenance fees or penalty fees? Is there a long term contract? Are there monthly minimums? Does the invoice factoring company provide credit and collection services at no additional charge? What accounting reports will the factor supply?  What value-added services does it provide? 

Most business bankers are a good referral source for reputable factoring companies.  Bankers refer to business factoring companies because they realize that although the customer may not be bankable at the time of the referral, in a short time it could be a viable candidate for conventional account receivable financing. As a short term accounts receivable financing solution, factoring relationships generally run from 6 months to a couple of years.   

Businesses choosing to maintain momentum, despite a lack of conventional accounts receivable financing options, find that factoring not only offers cash but also a stable foundation on which to build. They look to a future of managed growth and profitable performance that will bridge the gap to qualifying for bank receivable financing.