Solve Your Business Cash-Flow Crisis With Factoring
By Kim L. Clark
There are times in the life of every business when cash is needed ASAP. The wolf may
be at the door and there is a struggle to keep the business alive. Conversely, there may be
a rare and lucrative opportunity knocking and as we all know, most of the time it takes money
to make money.
Collecting receivables has become an adventure for many business owners and consulting
solopreneurs, as we all know. Customers may be asking for extended payment terms. Big
corporations that can easily afford to pay outstanding invoices within 30 days are increasingly
adopting the mean-spirited practice of paying small business vendors in 45 - 60 days. This can
put businesses that already operate on a thin margin into a dangerous cash-flow bind.
Factoring may be the solution to a business owner's cash-flow problem. In factoring,
uncollected accounts receivable are sold to a company that will pay the value of the invoice
to the business owner, minus a fee.
Some factoring companies host online real-time auctions of accounts receivable and invite
businesses to sell outstanding invoices. The auctions enable businesses to sell their receivables
to bidders in the global institutional investor market. Sellers are paid the auction value
of the receivables and gain access to working capital.
According to The Receivables Exchange, typical sellers have more than 60% of their working
capital tied up in accounts receivable and as a result they are limited in their ability to
take advantage of important opportunities or otherwise expand their businesses.
Factoring companies can make available badly needed capital to (certain) businesses that
cannot obtain traditional financing or cannot wait out a credit approval process. Receivables
are sold to a financial institution at a pay-out rate that is usually between 75-80% of face
value. The 20-25% held back is called the reserve.
The quality of receivables determines the reserve amount, as does the historical average
turn-around time of invoices. In other words if large, well-known companies are the receivable
accounts and they tend to pay within 30 - 45 days, the reserve percentage will be lower than
for receivables that are paid in 60 + days, for example.
Cash is usually sent in 5-10 days. There is no credit check. Once the receivables are
paid up, the business owner is paid back the reserve, minus a factor fee of 2-5%. Additionally,
there is a fee of 1/8 to 1/15 % assessed for every day past 30 days that the receivable is
outstanding. It's a heavy hit to take, but money is quickly raised and with few questions asked.
Moreover, the factoring company assumes the risk of customer default.
When evaluating whether or not factoring makes sense for your business cash- flow challenge,
do your homework. Ask your accountant for a recommendation and visit the websites of the Commercial
Finance Association or the International Factoring Association.
Investigate also receivables auctions, where it is often possible to obtain more favorable
rates than factoring. Be advised that the auctions are not available to all businesses. To
be eligible for membership, the business must have minimum annual sales of $2 million, must
have operated for at least 2 years, must be registered to do business in the US and can have
no tax liens. The application fee is about $500.00.
Kim L. Clark is business strategy and marketing consultant who works with for-profit
and not-for-profit organization leaders who must achieve business goals. She is founder and
principal of the consulting firm Polished Professionals Boston and she teaches business plan
writing to aspiring entrepreneurs. Learn how Kim's expertise can benefit your organization
when you visit
Polished Professionals of Boston.