How To: Work With a Factor May 19th, 2008 · 2 Comments by Nancy A. Motl, Ladies Who Launch member, Cleveland illustration by Barbara Hranilovich To start, let’s clarify what a “factor” or “factoring” is. Factoring, also known as “accounts receivable financing,” is an alternative form of financing used by businesses large and small. It makes it possible for business owners to secure the working capital they need for growth (and yes, sometimes survival!) without creating new debt. While factoring has been used for thousands of years, it became very popular in the U.S. garment industry when receivables were not being paid as quickly as companies were receiving orders for more garments. It’s a very flexible financing tool and helps all kinds of businesses meet payroll, take advantage of supplier discounts, or just increase liquidity to maintain growth. If a business has been turned down for financing by a bank, it can often benefit from factoring for a period of time to make itself bankable. And truth be told, some businesses find factoring so effective that they continue to factor their receivables even when they just need an infusion of cash. Factoring … • is NOT a loan—you are NOT incurring debt or giving up equity • does NOT require years of profitability as traditional loans do • does NOT take weeks to secure your funding • does NOT impact the business owner’s personal or business credit • does NOT require a strong balance sheet • DOES require invoices to other businesses or government Ask yourself … • Would having cash available on demand help you take control of your cash flow? • Could you increase sales with larger companies if 30- to 60-day terms were offered? • Would having cash allow you to take your business to the next level? • Wouldn’t it be great to have a line of credit that grows as your business grows? If you answered yes to any of these questions, factoring may be the solution. You may already have the cash you need at your fingertips. A Simple Example of Factoring A factoring company recognizes an invoice as an asset to purchase, as long as the products or services have been delivered and accepted by the customer. The factor will verify this and an advance is funded to you. Typical funding is 75- 95 percent of the invoiced amount. This can be completed the same day the invoices are received. The 5-25 percent, called the “reserve,” is held by the factoring company. The reserve is held until the customer pays the invoice. Once the invoice is paid in full, the factoring fee is taken out and the balance is available for withdrawal, or may be held in a reserve account. Your company factors an invoice for $1,000.00 You are advanced 90 percent or 900.00 10 percent is held in reserve or 100.00 Factoring fee is 3 percent (30.00) * Balance $70.00 *Fees are based on several variables, including the industry and length of time the invoice goes unpaid. Today there are factoring companies capable of working with just about any industry, as long as the invoices are B2B or B2G. Industries that use factoring include: • Apparel or any other manufacturers • Technical/training consulting • Staffing agencies • Trucking • Commercial janitorial/cleaning services • Construction • Railroads • Cable and wire installers • Health-care suppliers and providers (medical receivables are handled differently and take a bit longer due to regulations and compliance rules) Nancy A. Motl is a member of the Cleveland Incubator and the founder of Today’s Funding Solutions. For more articles like this, visit www.ladieswholaunch.com, the first company to provide resources and connections exclusively for women entrepreneurs.
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