Factoring can give business ready cash.
Question: My business is good and my accounts receivable are strong but credit is tight. Can I get funding by factoring my accounts receivable?
Answer: Factoring is a sale of commercial accounts receivable at a discount for immediate cash. In a typical transaction, you deliver to the factor a sale and assignment form listing the specific accounts receivable sold, along with the underlying invoices. The factor is then entitled to receive payment from your customers.
Unlike a lender, a factor is more concerned about the credit worthiness of the businesses that owe you money than with your credit score.
So even though your business may not be able to obtain conventional financing, factoring can bring in ready cash.
Factoring is better for some businesses than others. It works best for a business with a short term mismatch of available cash with expenses but with accounts receivable from creditworthy customers.
Consider some examples: you have completed a large project and expect payment in 30 to 60 days but you need cash to meet payroll this week; or you have an excellent opportunity to expand your business and need ready cash; or you have plenty of cash in the pipeline but need to pay the IRS within the next 15 days; or you have finished a major project and need to ramp up for the next one before the payment for the finished project is received.
As a purchase price, the factor pays you the amount of the receivables assigned reduced by a discount and perhaps a small service fee.
The discount, based on time elapsed between assignment and payment of the invoices, will be about one-tenth of one percent per day.
At the time of sale, the factor will pay you 70 to 90 percent of the assigned accounts receivable. The factor holds back part of the amount to cover the discount when calculated, the service fee, any offsets that your customers rightfully claim and sometimes a bad debt reserve.
As the invoices are paid, the unused portion of the holdback is remitted to you.
Large scale factoring is mostly done as a non-recourse sale of receivables. The factor takes the risk of your customers' non-payment. The factor will protect its investment by checking credit ratings of your customers and will try to verify that all conditions to your customers' obligations to pay have been satisfied.
Small and medium scale factoring may be on a recourse basis requiring you to make good on any debt that goes bad.
Factoring can be a useful business tool even when credit is available.
A working relationship with a factor often provides added benefits such as AR management support and creditworthiness information on prospective customers.
ASK SCORE appears regularly in the Sunday Business Section of the Register Guard. E-mail questions to email@example.com. To schedule free business counseling sessions with SCORE, call 541-465-6600.