Using Your Receivables to Grow Your Business
· Factoring to Grow Your Business
* * *
* * *
* * *
Every time you extend credit, or terms, to a customer, you become the customer's banker. You are lending to your customer, interest-free, for however long it takes them to pay. The impact can be critical to your business:
· You can't take advantage of purchase discounts from your vendors.
· You may be forced to walk away from new business with good payers.
A growing business often has opportunities without the cash flow to meet them. Every business that has A/R has the choice of financing its customers from its own resources or using outside sources. There are no other choices. Factoring may be the outside source for you. Factoring is mostly for growing businesses that need cash flow to allow them to take advantage of opportunities. Factoring gets much to most of each invoice into your account a day or two after you submit it (amount depends on your industry, size of invoices, who your customers are, etc.). Factoring is even available to companies that have receivables totaling only a few thousand dollars each month.
Imagine having all the working capital you need! How much could you grow your business?
Your customers already deal with factors. Sometimes they know, sometimes they don't, but it won't be a new experience for them. In fact, if they even notice, they are likely to have more confidence in you because they see you taking steps to grow your business. In any case, probably the only person who will know will be the factor's point of contact who verifies that invoices have been received and are valid.
What are the basics of factoring?
· Our client (you) submits an invoice to an approved customer and to the factor at the same time.
· The factor may confirm product/service receipt with customer (avoiding later issues).
· The factor transfers about 80% of the invoice to your account.
· The factor receives the payment.
· The factor pays you the remainder minus its fee.
· Depending on your size and needs, your A/R department may become a monthly Quickbooks download.
What businesses factor? Any business that has to wait for its receivables is a candidate. They usually have to pay their employees this week but don’t get paid until next month. Some typical examples include:
· Staffing agencies.
· Service firms.
· Construction subcontractors.
· Trucking companies.
· Manufacturers (they might be able to finance some of their materials through purchase order financing).
· Auto body shops (insurance work).
· Leveraged buyouts when the acquired company has substantial outstanding receivables which can be sold at closing.
Any company that might have to pass on a new opportunity due to lack of cash flow should factor.
(Note that only commercial, institutional, and government accounts may be factored. Individual and residential accounts can’t. However, if your business is involves home improvements or something similar, we can arrange a consumer financing program for you.)
The factor doesn't care about your credit, only about your customers' credit. Factoring is not a loan, and it is not dependent upon, nor does it affect, your company's credit. You don't need collateral, and there is no lien on your property (but there is a lien on your receivables). Since you aren't borrowing money, no debts will appear on your balance sheet or credit report. The factor pre-screens your customers for credit-worthiness, so you’re protected from wasting your efforts on a deadbeat client. Because the invoice is usually sold non-recourse, if your customer can't pay, it's not your problem. (If the customer refuses to pay until you fix a problem, that is your problem.)
The factor receives and processes the payments. They gently and professionally remind – in your name - clients whose payments are late. All your A/R department has to do is receive a monthly activity report and confirm its contents. You might not even need an A/R department if you outsource to the factor. If you are your own A/R department, wouldn’t you like to focus on serving your customers, not collecting from them?
Yes, there is a cost to factoring. Factors remind your customer for you. They spot-check quality at delivery, so problems don’t fester. They provide reports you can’t produce.
Factors let you do what you do well, while they handle the receivables. It's a cost of doing business that pays for itself with a high ROI and helps you grow your business.
For a discussion of the logistics of factoring, including getting started, click here.
Also take a look at cash flow solutions other than factoring.
Can you afford not to factor?