Why Factoring Works

Working capital – Every business needs it but at what cost?

One of the main reasons why I enjoy working in the factoring business is that the concept is simple and easy to understand.

Factoring companies provide businesses with working capital by purchasing their client’s outstanding receivables.

Typically a factoring transaction is an arrangement between three parties (client, factor and vendor) all of whom are businesses. The business owner understands his profit margins and the expense associated with factoring while the factor evaluates the risk. In most cases the increase in cash flow will not only justify the cost but actually lower operating margins by increasing sales for the business.

But why is factoring so popular now?

There are several answers to this question but it basically comes down to qualifying for the capital. Banks make decisions based on business financial history, cash flow and collateral. Factoring decisions are largely based on the creditworthiness of the client’s customer. However, factors do perform extensive due diligence on the client as well. For more on this topic see our June 2011 article, “Factoring: Is it Always About the Account Debtor”?

Many of our clients fit into the category of small to mid-sized businesses that are in a growth mode but do not qualify for a traditional bank loan. Usually the client has been in business for an insufficient amount of time or they do not have enough collateral to secure a loan. In other cases some factoring clients will qualify for a loan however the amount is not sufficient to meet their cash flow needs. We feel that if we can help our clients grow to the point where they can raise additional capital then we have fulfilled a much needed void.

Another reason why factoring is so popular is the added value invoice factoring companies provide to their clients besides the traditional funding of invoices. Mostly all factoring companies utilize some type of specialized factoring software that allows their clients to track the aging of their outstanding invoices, accrued fees, receipts and so forth. Also, most factoring software packages allow the client to run a myriad of accounting and financial reports to compliment their accounting practices. By creating a transparent environment between the client and factor it allows both parties to be on the same page and proactive with account debtors.

Also, invoice factoring relies heavily on credit evaluations on both the client and customer. Once the client has passed the appropriate credit checks, they should also be informed about the creditworthiness of their customers. Before we begin factoring any of our client’s customers we always perform a thorough credit analysis. If one of our client’s customers has been declined for our factoring services our client usually follows our lead and will not do business with them. Think about that benefit. As a client you are receiving a full credit analysis from an underwriting team that is helping you to make important decisions about potential customers.

Partnering with the right factoring company can provide huge added benefits for any business looking to get to the next level. Remember, it’s not just about the money.

Don D’Ambrosio is the president of Oxygen Funding, Inc., an invoice factoring company located in Lake Forest, California.

For more information, he can be reached at don.dambrosio@oxygenfunding.com or you can visit his company’s website at www.oxygenfunding.com