You may have heard the old business owner's lament: “You can do a beautiful job on time, but it doesn't always mean you're going to get paid on time.” If you're reluctant to pressure your clients to pay up because you don't want to lose their future business, factoring can help!
Any business with accounts receivable can use factoring. Instead of waiting 30, 60, or even 90 days for invoices to be paid, a business can sell those unpaid invoices to a factoring firm, which advances payment of 65 or 75 cents for each invoiced dollar.
The business then has immediate cash for operation, without debt. The balance due is held back in a reserve account. Once the factoring firm collects full payment from the client's customer, the reserve is returned to the business, minus a small service fee. Once you've established a relationship with a factoring firm, it usually takes 24 hours to fund invoices.
Because the factor is not making a loan, the business' credit history is not important. The factor will, however, analyze the credit of the customers who will pay the invoices, as well as verify in writing that the invoices are indeed due, and that the goods were received and accepted, work was completed and accepted, or a service was rendered satisfactorily.
This valuable credit analysis can be a huge bonus to any business that is large enough to extend credit to its customers, but not large enough to have its own credit department. Some businesses have their factor handle their entire customer invoicing. By outsourcing this task, the business has immediate access to all invoiced funds without the administrative hassles.
Factoring used to be seen as a last resort for companies in financial trouble. Now, healthy businesses use it like a line of credit to manage financial bumps. Factors may also be able to provide more money than a bank can, because factors don't take their clients' credit-worthiness into consideration. Rather, they depend strictly and solely on the credit-worthiness of their clients' customers.
