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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   January 2008

Factoring the Advantages

For business-owners who need working capital fast, this form of financing could be the answer

When a company seeks working capital for its unpaid invoices, traditional lending regulations might not permit many lenders to provide the financial assistance needed. These institutions also don’t typically lend on invoices alone without other collateral.

In such a scenario, company decisionmakers would be wise to look to factoring as an alternative-financing solution. Moreover, astute mortgage brokers should consider adding this alternative-financing arrow to their economic quivers.

Understanding the advantages of factoring as an additional tool for your business-owner clients can allow you to help meet the supplementary, working-capital needs of clients who cannot otherwise receive quick financing.

Factoring is a financial practice that allows businesses to sell outstanding invoices to a factoring company. Essentially, when the company has already delivered its products or services and is waiting for payment, it can sell its invoices to improve cash flow immediately.

Because the company is selling invoices for products or services already delivered, factoring is not considered borrowing money or selling an asset. Therefore, no debt is created. Usually, it doesn’t require pledging other assets as collateral. In addition, there are no long-term obligations, no multiyear binding contracts, and no minimum or maximum amounts to factor.

This financing tool works for many types of businesses, including start-ups, high-growth and cyclical companies. It is also well suited for undercapitalized companies with a strong customer base, for turnarounds, or for troubled companies that may see a strong upside future.

With factoring, business-owners obtain working capital based on the credit of their invoiced customers, not their own company. So factoring is an option even if the business-owners seeking it have less-than-perfect credit.

When your clients turn to factoring, they can cover recurring company expenses such as payroll, rent, operating costs and payments to key vendors in a timely manner. Further, they can stay focused on their core business rather than taking time with the sometimes-difficult details of accounts-receivable management. Factoring also can lower accounting costs with the collections assistance provided by the factoring company.

Risk, terms and product type are all variables that determine the cost of factoring. Clients can approve or disapprove the contract rate and terms in advance of funding.

This financial solution allows small to mid-sized businesses to obtain working capital with the speed and reliability usually reserved for larger corporations. It’s a key cash-management tool that can increase a company’s productivity and profits. Borrowers can factor as many, or as few, invoices as they wish.

In today’s market, factoring is a solid, reliable business practice. It is true that companies with problems may seek it out, but many companies factor simply to accelerate and promote their own growth.

Receivable factoring is now so widely recognized that many retailers and vendors include a space on purchase-order forms asking whether the invoice is to be factored. At one point, factoring was available mostly to larger companies with substantial sales. Today, it is a preferred financial tool for many small and mid-sized businesses.

A good factoring company can provide business flexibility. In turn, those businesses that use factoring receive increased flexibility and growth potential. For commercial mortgage brokers, helping your business-owner clients receive such options can make a great impression.


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