Factoring receivables is one of those old ideas that has enjoyed new life in this ever-changing and unpredictable economy. A long time ago, there was a bit if a stigma associated with factoring. Only those companies who couldn’t get financing any other way would consider factoring their receivables.

These days, factoring is a wonderful option for a broad spectrum of companies who need creative ways to bridge their cash flow gaps.

Receivables factoring allows companies to get cash right away for their invoiced work. The factoring company fronts the money and waits to get paid by the customer. In exchange, the factor will charge a fee and hold some percentage of the receivable until the amount is paid.

For startup companies, this is a great way to speed up cash flow, especially if you don’t have the ability to get the credit you need from a bank. The factor bases its arrangement on the creditworthiness of your customer, not on your company. So if you’ve hit a snag in your cash flow and the banks won’t help, factoring may be for you.

Factoring is also a good option for seasonal business who do large orders only a few times a year. They can smooth out the cash flow cycle by factoring those receivables that create large spikes in their revenue stream.

Different factors have different requirements, and it’s important to ask a lot of questions before you choose a factoring company. A non-recourse factor will assume the liability if your customer doesn’t pay due to financial reasons, and they will not charge you back for unpaid receivables because they carry insurance on those invoices. Some factors allow you to pick and choose which invoices you want to factor. Fees and advance percentages vary across the board, so be sure to do some homework.

Finally, consider the intangibles when you analyze the cost of using a factor. If they collect on your receivables for you, you can virtually eliminate a lot of your back office receivables function. You also do away with bad debts on your balance sheet. And most factor fees are deductible as a business expense.

To learn more about factoring and to get some advice on whether or not it’s right for you, I suggest you contact Cheryl O’Neill at Amerifactors. Find out if factoring is a winning strategy for your business.

 

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