As published in Scotsman Guide's Commercial Edition, October 2005.
In a past Scotsman Guide, I explained that hundreds of businesses nationwide use factoring as an alternative financing tool to aid with slow cash flow. Factoring is the purchase (by a factoring company, or a “factor”) of creditworthy, commercial accounts receivables belonging to a business in exchange for immediate cash for that business.
Accounts-receivables funding can help businesses fulfill many functions: meeting payroll deadlines, increasing purchasing power, stimulating growth, improving collection time, keeping pace with growth or providing immediate increased cash flow without creating debt.
This month, I will answer many common questions about factoring as an alternative source of financing.
Question: Why should my clients factor?
Answer: Factoring is a needs-based product. If a business has no need or desire to improve its cash flow or overcome temporary capital shortages, then factoring is not the right choice. Some businesses have no invoices available to factor. For many businesses, however, factoring is a viable alternative financing solution to their capital shortages.
Q: Is accounts-receivables funding a new financing option?
A: Accounts-receivables funding is one of the oldest forms of financing.
In the United States factoring began before the American Revolution, when merchant bankers in England advanced funds to colonists in exchange for raw or finished goods that were shipped later. Until the mid-1980s, most people thought accounts-receivables funding was only used in the textile and garment industries, in which terms typically exceed 90 days. Today, though, factoring is used for all types of businesses that extend credit terms to their customers.
Q: Isn’t factoring too expensive?
Bank loans are less expensive than factoring. Factoring, however, can provide a greater borrowing base than most lines of credit. This in turn will allow a business greater flexibility. Furthermore, if business managers can’t expand their lines of credit, then factoring will provide opportunities for improved cash flow. The bottom-line results can justify factoring fees.
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