Turn your receivables into quick cash
"Factoring" can be a godsend for growing businesses that need to smooth out their cash flow. Here's what you need to know about it.
Gary, San Jose
Can you recommend a reliable factoring company? Is there any factor company that can work with us to invoice our clients using our name, so that our client doesn't know we've factored our receivables?
By Kathleen Ryan O'Connor, Fortune Small Business contributor
First, a bit of background on the practice. Factoring is essentially selling your accounts receivable in exchange for cash up front. You get a percentage of the value of your invoices, say 70% to 90%, now instead of 30 or 60 days out.
In exchange for the quick liquidity – some factors can get you cash in just 24 to 48 hours – you pay a fee that can range anywhere from 1% to as high as 15%. When your client pays the factor, they keep the amount they've advanced you and send you the balance.
The practice has come a long way from its past image as something reserved for businesses with bad credit. Rapidly expanding but cash-starved startups and companies forced to wait a long time for payments from solid clients are particularly well-suited to take advantage of the practice.
The downside is that factoring can be more expensive than a traditional lender – think of it as more akin to a credit card than a bank loan – and in small-margin businesses, the cost of factoring can cut too deeply into profits to make it sensible.
"Factoring is very good when your business is growing, but it’s not a savior for a dying business," says Scott Applegate, COO of CapitalPlus Equity, a factoring company out of Knoxville. "All it would do for a dying business is prolong the death."
Dave Theobald, a critical-care nurse who founded his own medical staffing firm for nurses in 2004 in Clifton Park, N.Y., Stat Staff Professional, says the factoring relationship he established with Anchor Funding Services was crucial to the his business's growth.
As a staffing firm, his company's single biggest expense is payroll – and its payments largely come from hospitals, which are notoriously slow to cut a check. In two years, his monthly payroll grew from about $10,000 to $2.3 million. Factoring allowed him to meet his cash-flow obligations and to keep expanding, he says.
It's a great time to be in the factoring business. As the financial crisis continues to squeeze credit markets, small business owners are left looking for new avenues to raise cash.
"Business is up," Applegate says. "Typically when banks tighten up, our business – or at least the business opportunity – gets better. But when that happens, there are a lot of people who are fraudulent looking to get into the business." Factors also report seeing a jump in bogus invoices in tough times.
The Commercial Finance Association, a trade group, says U.S. factoring is enjoying strong growth. Their most recent survey shows U.S. factors had a transaction volume of $135.3 billion in 2007, up 6.5 % from the $127.6 billion they did in 2006. That figure represented a nearly 13% increase from the year before.
Another reason small business owners may like factoring is that the factor can essentially function as an outsourced accounts receivable and collections department, freeing the owner to concentrate on other aspects of the business.
The credit of your clients will play a major role if you contract with a "non-recourse factor," one of two types of factoring companies and the most prevalent. Non-recourse factors take on all the risk if an invoice is not paid, which gives the business owner some shelter from the risk – but they change more for the service. "Recourse" factors, which have lower fees, do not assume that risk. If your client doesn't pay up, you'll have to repay what you've been advanced.
Dealing with credit and payment issues can be a huge burden for a small business owner. When you consider that a factor takes over that work, factoring can be cheaper than a bank, says Kevin Gowen, CEO of AmeriFactors Financial Group in Celebration, Fla.
As for recommendations, we can't single out a company, but Bert Goldberg, executive director of the International Factoring Association, says his group offers its membership database to the public and that those who join sign an ethics pledge. You might also want to check with the Better Business Bureau for any complaints against a factor you're considering.
As for whether or not you can make it seem like payments on factored invoices are still coming back to you, the short answer is, it depends. The companies we talked to are happy to work with clients on such issues, but in general payments will go to a P.O. Box accessed by the factor. Some companies tout their ability to make their role invisible, billing customers under their client's name.
From Ray Carmoor Yes. We spoke to Riviera Finance as well. They are good company to work with and their fees is reasonable. We did not use their services though as we got a private funding from elsewhere.
From Rick Blue Freedom Supply Company,LLC
We have used Riviera Finance for over two years, and have never had a problem. We sell supplies, (such as flagging tape, marking flags and marking paint), to land surveyors and geo-physical firms. Riviera frees up our time to focus on issues other than collections, etc. http://www.freedomsupplycompany.com
From Daljeet Sidhu, San Ramon, CA Here is a great factoring services article that may help you secure financing against your account receivables: http://www.tradeseam.com/smallbusiness/buying-guides/view-buying-guide/1170/Factoring+Services
Hope this helps you!
From Joanna, Orlando Florida I have been using factoring with Americfactors in Celebration Florida since the start of the first quarter in 2008. It does allow your business to free up the money owed and keep your doors open. I think without Amerifactors I would have closed by the second quarter of last year. I own a large automotive repair shop that works many fleet accounts.
From Jerry Kovach A lot of business owners are getting conservative. We are viewing this economic hardship as an opportunity to improve our training, customer service and marketing. Regarding Accounts receivable, don't push to hard, the relationship is more important than some hurt feelings that can damage the account. Instead, Atlanta House Cleaning policy is to focus only internally and let the chips fall where they may.
From Kristin Gabriel I just sent out a release for my client The Interface Financial Group — http://www.ifgnetwork.com — on how businesses can avoid cash flow crunch in the New Year. It might be of assistance….
From Blaine, Los Angeles, CA Factoring is a great solution to not only get cash flow for a business, but it also provides risk protection and administrative services. For small businesses whose business cycle may not be consistent, the ability to take on significant new business without having to expand their administrative infrastructre is key.
Riviera Finance has been specializing in this brand of factoring since 1969 and helps businesses with between $100,000 and $20,000,000 in annual revenue. Please visit http://www.rivierafinance.com for more info on how factoring might help your business.
From Patricia Dukeman http://WWW.ANGELITESERVICES.COM
From Patricia Dukeman, Homosassa, FL Factoring has been around for centuries. In the past factoring has been a means of obtaining operating capital for startups many times service companies without a proven track record, or inventory or equiptment needed to be on a bank's radar.
Today the scenerio has changed. With credit scarce even to proven entities factoring is an alternative. There are some additional benefits. Billing is generally assumed by the factor. No mailing invoices or postage. The change is fairly transparent to existing customers usually just a change in address.
I refuse to let the current economic climate shape my destiny. My reaction was to open a business to give individuals and other small business owners cash flow options.
From Brooks, Chicago,IL As banks continue to tighten their credit policies, businesses will find it increasingly difficult to obtain the credit they once enjoyed. Factoring is becoming an increasingly popular and sometimes the only choice for businesses.
Advance My Business Cash is an alternative to small business loan programs. Our programs have been specifically designed for small businesses to help them with their business working capital needs. Businesses can receive up to $1,000,000 from Advance My Business Cash in 7 days or less. http://business-cash-advance.cjb.in/
From ed roush, RTP,NC Roushfinancial is a financial services branch of Mazon Associates that specialized in providing clients with the convenience of instant cash by financing your accounts receivable. We will pay you first on your invoices, and then collect your money for you. If we can not finance you due to the nature of your business, we will try to get you in contact with a company who can the same day.
Mazon Associates was established in the Dallas-Fort Worth area in 1976. Mazon's dedication to it's clients is reflected in their quality of services which include credit analysis for new accounts, same day funding for existing clients, and professional collections. Roush Financial an east Coast branch of Mazon Associates brings the 32 years experience factoring together with the 7 years of accounts receivable service for Fortune 500 companies for IBM and Lenovo together to give their clients the best funding service possible.
We are a family run business.
http://www.roushfinancial.com/
From Ritesh Kumar Coral Capital Solutions is a NYC based commercial finance company that offers speedy and flexible funding.
http://www.coralcapitalsolutions.com/
Coral is well capitalized and will be able to work with your flexible needs.
From Paul South Florida Small Business needs to streamline operations and reduce the amount of unsold,dead-stock merchandise that is costing money to store and is increasing taxes on inventory. By reducing this inventory,businesses can restock on demand with current,fast selling merchandise. Avoid the liquidation companies as you will only get pennies on the dollar for your stock,bringing your total losses to almost 100% after taxes and other costs. A better avenue is to locate another business owner that wants this merchandise, as they can sell it rapidly in their market(ie: a South Florida merchant sells winter coats to a business up north.) The seller reaps a higher return over liquidation and the buyer gets a discount over purchasing from a vendor or factory for the same items.
To reach these businesses that are looking for your dead-stock visit http://www.sellmyinventory.com and advertise to thousands of businesses all over the country.
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The key components to understanding Factoring are:
1. Growth Rate – What is the organization's internal growth rate? If it is too high, external financing is required. In lieu of moral hazards like HELOC's and personal credits, an operating business line with a bank requires the ability to debt service a loan that is fully collateralized by hard assets (equipment, real estate).
2. Factoring creates a cash heavy balance sheet that permits exponential growth. Businesses more often then not miscalculate their cash needs to operate their business. The default reaction is to go to a bank for an operating line of credit. What they do not realize is that a business operating line of credit is based upon the ability to 1. "debt service" a 2. "collateralized" loan. The ability to debt service is calculated by apply the current loan (new debt) to past performance. Does this provide an answer to fuel growth? Usually it does not add much more than what the organization can do beyond their own internal growth rate. The simple formula for an operating business line is
- 10% of gross revenue for the past 2 years of the business. If the organization made $1 million, you can anticipate an operating line of approximately $100,000 if….
- Loan is fully collateralized by all business assets including personal if required
- The ability to debt service that amount base upon past performance (what happened to the economy in 2008?)
- No concentration issues beyond 10% of your aging report (some banks say "20%" but be skeptical of that) and no one over 60 days past due
- Great personal credit
3. Factoring Recourse vs. Non-Recourse – unlike a business line of credit or business credit cards and even recourse factoring, Non-Recourse Factoring does not create a short term liability on the balance sheet of the company. Although factoring recourse may appear to be less costly, the client may have to purchase credit insurance to protect the recourse factoring company. Factoring recourse also requires a blanket UCC Filing on all business interests and assets much like an operating business line of credit. Factoring non-recourse requires only a UCC Filing on A/R and in some cases, inventory. This may not be a consideration now but the client needs to be mindful of future needs to access other credit instruments.