When Should a Business Use Factoring?

Opportunity-factoring-290Need to meet payroll?   Are suppliers demanding payment?   Has the bank reduced or pulled your credit line?   These are just a few of the challenges facing businesses in today’s economy.

In fact over one third of banks surveyed by the Federal Reserve in April 2009 have reported a decline in credit line and credit card limits for businesses.

Accounts receivable factoring supplies an alternative solution by providing a cash advance on outstanding invoices.   Since it involves the sale of an asset at a discount rather than a loan, it can provide a viable financing option as banks continue to tighten their business lending.

Here are three ways to know if your company could benefit from discounting invoices to a Factor:

1.   No Longer Have Enough Conventional Financing – Factoring is considered specialty financing making it generally more expensive than conventional bank loans.   It might seem obvious but if a business has sufficient financing through traditional bank channels than selling invoices isn’t really necessary.   But when banks say no or existing credit lines dry up the only alternative might be the funding factoring provides.

2.   Need Quick Short-Term Working Capital – When suppliers are demanding payment or payroll is looming, obtaining an advance on outstanding invoices can provide a quick infusion of cash.   The initial application process can often be completed in under a week and once approved most factors can fund qualified invoices in 24 to 48 hours.

This makes it a common financing arrangement for some industries like manufacturing or temporary staffing.   For instance, a staffing agency is often in the position of paying their temporary workers on a weekly basis but payment on the contracts could roll in two to four weeks later.

3.   Potential Growth Profit Outweighs Cost – When a business has an opportunity to grow the cost to factor can make economic sense.   For instance, ABC Widgets sells product at an 18% profit margin and has the opportunity but not the funding to expand business.   Initially it might seem expensive for them to pay the 3 to 5 percent discount fee a factor charges.   However, if ABC Widgets can now transact more business at the 18% profit margin they will still realize 13 to 15 percent in additional profits for the increased business.

The entrepreneurial spirit of the small business owner is a key component in paving the road to economic recovery. Factoring accounts receivable can provide an alternative cash flow solution to provide the working capital it takes to get the job done.

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