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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.