Banks typically make their credit decisions based on the financial strength, the financial wherewithal (assets) of the business and its owners.
In an era when businesses are increasingly considering different methods of financing, factoring accounts receivable has become a viable and popular alternative for businesses across North American. It is the nature of the factoring model itself that is attracting business owners who are looking to quickly free up cash flow for their businesses.
Factoring is an extremely useful tool to unlock working capital tied up in a company’s accounts receivable. In addition to being faster and having considerably less red tape than applying for a bank loan – Factors are not lenders but, rather purchasers of current or outstanding invoices. It can sometimes be confusing because Factors charge a discount fee based on the length of time it takes for a customer to pay for the invoice, once the invoice has been purchased by the Factor. Most business loans require regularly scheduled payments stretched over a specified period of time, such as monthly or bi-weekly. With factoring, a business can receive up to 95 percent of the invoice amount within 24 hours of selling the invoice to the factoring company. The customer now pays the invoice amount to the factor. The Factor then subtracts the discount fee from the invoice payment and credits the rest of the invoice amount not advanced in the beginning back to the company.
Businesses that are less than three years old are inherently attracted to factoring because many banks have increased the minimum years a company must be established and show a profit from two years to three years. So any new start-up that sells products or renders services to another business (and issues invoices) can qualify for factoring.
Service companies are hot factoring candidates. Typically these companies don’t have any hard – or limited – assets to pledge as security to the bank to obtain traditional forms of financing. Companies like: temporary staffing, nurse staffing, security companies, contract cleaners, landscapers, janitorial, marketing and IT consulting, distribution, warehousing, property managers, importers/exporters, telecommunications or any equipment/repair service company, etc.
Providing factoring facilities to government vendors (contractors) has become big business over the past few years. The government is the largest and best payer of invoices across the country but, in many cases pays really late. If the government vendor can’t meet the delivery terms of the government contract (due to the lack of available working capital) the vendor stands the chance of losing the contract all together to the next competitor. The Notice of Assignment of Claims Act created the process by which a “financing institution” may collaborate with a government contractor to have the contractor’s payments under prime contracts paid by the government customer directly to the Financing Institution. This makes it quick and easy for Factors to implement the facility.
Factoring is an alternative financing strategy that can suit many businesses in many sectors. For businesses that do not fall into traditional lending requirements, factoring can provide a very quick, viable and accessible alternative to create immediate debt free working capital to help a business grow and thrive.
Michael Ponomarew joined the Factoring industry in 1999. He is the Founder and CEO of The Finance Institute. Managing Director of The InvoiceXchange. Factor member that managed $750+ Million in Factoring transactions. Acclaimed industry educator that has taught over 5,000 business professionals, consultants and business owners how to profit in the lucrative Factoring industry. Contributing author industry publications and blogs, guest and key note speaker. Established and vended three successful businesses prior to joining the alternative finance and private lender industry.
This article original appeared in Private Lender: March/April 2016