Business Receivable Factoring

Small and medium companies often use business receivable factoring to access cash tied up in inventory or outstanding invoices. Often the gap between purchasing and selling products and services leaves business owners struggling to meet monthly expenses such as loan repayments, payroll, rent, additional inventory and other miscellaneous bills. Financing from banks takes time, sometimes weeks. New upstarts, especially, often lack the assets needed for collateral to secure small business loans. When borrowing is approved, the loan amount is usually much less than needed. Cash flow is tied up in invoices that haven't been paid, and entrepreneurs are often stuck waiting on their customers. Also known as invoice or account factoring, business receivable factoring is a short-term solution that allows entrepreneurs to sell invoices or receivables for immediate cash, freeing up cash flow for monthly needs until products and services have been paid.

Dating back for centuries, business receivable factoring is one of the world's oldest methods of financing and today, is a legal, multi-billion dollar industry. Since factors are not regulated like banks, transactions are technically not considered loans. They are simply third party commercial companies that purchase invoices at a discount rate. Money is repaid when payment is received from the customer, usually within a very short, specified period of time. Recourse factoring requires the business to reimburse the factor for any funds not collected and usually offers cheaper rates. Non-recourse factoring is more expensive, because the factor assumes all risk for the invoice if it is unable to collect unpaid amounts. Factors also differ from banks in the way rates are set. Banks evaluate the credit worthiness of the company, but factors evaluate the credit history of the customers. Rates and percentages are set according to how reliable the customer is as well as the age of the invoice. Current invoices pay more. Accounts over 90 days old are often not able to be sold. Financers typically pay between 75-90% of the value of the invoice. Some don't care how old the invoice is unless it is over 90 days past due. Others will use a graduated scale to value accounts under 30 days, from 31-60 days, and from 61-90 days.

Although more costly than traditional bank loans, business receivable factoring is an attractive option for many companies. It frees up company resources spent on collections. Businesses don't have to hire extra personnel or an external collections agency. Most factors provide a complete credit check of all customers, updates the company on payment history, and follows up with customers who are past due on accounts, saving time, money and hassle for many business owners. Factoring also frees up cash flow tied up in inventory and provides a quick way to get cash without incurring any debt. Opposed to bank loans which can take weeks or months, a business receivable factoring company usually provides cash in a couple days. Online companies can turn money around within 24 hours. No business plan or tax statements are required. Money can be used for whatever the business needs - inventory, new, personnel, payroll, bills, rent, etc. - until the company is solid enough to qualify for a regular credit line or additional loan. "But they that wait upon the LORD shall renew their strength; they shall mount up with wings as eagles; they shall run, and not be weary; and they shall walk, and not faint." (Isaiah 40:31)

But business receivable factoring does have some drawbacks. Factors can take out up to a 20% discount fee on invoices, plus financing fees range from 2-3%. Interest rates are also applied each day and can vary depending on the age of the invoice. These costs exceed interest and fees usually applied to traditional bank loans. If customers default on the invoice, the factor seizes the pledged accounts, rates usually go up, and under some contracts, additional penalties apply. Furthermore, businesses have no control over who is speaking with their customers. Most financers treat customers well and with respect in order to get payment and keep the company's contract, but customers may not prefer dealing with an outside vendor, risking some business loss. Although some states require customers to be notified, others do not.. Factoring is not an appropriate solution for long-term cash problems or companies having difficulty collecting payments from their clients.

Before deciding to sign with a business receivable factoring company, research the factor and the contract thoroughly. Make sure the contract includes a clear definition of all the fees and terms of payment, including initial payment percentage, setup fees, discount rates, and timelines for final payments. Know about any minimum monthly volume or invoice amounts. Review the collateral requirements. With most factors, invoices are the only collateral required, but some may require additional security such as the lien against company assets or other clauses to protect them against non-payment. Meet with the company personally and make sure they have a good reputation with working with customers directly. Learn about their history. Talk to who will be handling the communication with customers and how that will be done. If possible, review all letters and phone scripts. As with any business transaction, have a lawyer review the contract before signing.

Business receivable factoring can save a company from bankruptcy and ensure its survival, but should only be used as a last option after all other resources have been exhausted. Factoring is generally not a good idea for businesses struggling with collections or that aren't growing rapidly enough to repay a factor for invoices sold. Before deciding, evaluate customer payment habits to see if they might cause a problem. Weigh all the options. Investigate companies and contracts thoroughly. Negotiate rates when possible. If the timing is right, factoring can be a viable and lucrative option. But if the timing isn't right, it can end up costing a company its very own survival.