For the benefit of those who do not know what it means to factor accounts receivable, we begin with a simple definition thus: Factoring is the sale of invoices at a discount. It is a method of funding used by businesses to convert accounts receivables into immediate cash.

By factoring receivables, a business can receive cash on outstanding invoices from a payer other than the original obligor of the invoice also known as a factor or funding source. For the privilege of receiving immediate cash instead of waiting to collect payment, a fraction of the invoice is discounted. Later, the Factor will collect the full face value of the invoice from the original owing customer.

Obviously, the main reason a business would factor accounts receivable is to expedite invoice payments and obtain immediate influx of cash, thus improving cash flow. It may be practically impossible to list all the reasons why businesses would want to improve cash flow, but we can share with you some of the most common reasons why our past and present clients factored.

With the exception of non-profit organizations, the objective of most businesses is to be profitable. There are many ways through which a business can become profitable, such as to increase sales, control expenses, reduce overhead, improve management and so on. Many businesses today are willing to give up some percentage of their receivable for the benefit of having immediate and improved cash flow.

Recent data has shown that factoring is used more than all other types of business financing combined. It provided in excess of $20 billion in 1976, $70 billion in 1998, and over $100 billion to the U.S. economy in 2000. It is expected to top $200 billion by 2010.

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If your customers are paying slow and asking for extended payment terms, if you could do more business by offering terms, or if you are experiencing a cash flow squeeze for any reason, you should consider establishing a factoring account
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Factoring continues to be viable regardless of economic conditions. The present economic slowdown has affected all industries including financial institutions, both in the public and private sectors. Increasingly, businesses are having difficulties securing needed capital to fund daily operations and provide for future growth. Conventional lenders, who typically are very stringent in extending credit anyways, are getting even tougher. They are declining more loan applications than ever. Factoring which is more flexible and readily available with greater risk tolerance, is capitalizing on the market trend to fulfill the increasing demands for cash.

Because of the slowdown, many large and well-established businesses are laying-off workers, shrinking operations, and merging with other companies in order to survive. Sadly, small and medium sized businesses are in far worse situations because they are less able to cope or get off the ground. Many of them will be forced to close, unless they can solve their cash flow problems.

Thank goodness for factoring. Even though more companies are paying bills later than usual, the effects of slow pay are not as drastic as it would otherwise have being without accounts receivable funding. Factoring lines of credit gives businesses the ability to operate in a timely and efficient manner and it is directly related to sales. Sometimes, it is preferred to borrowing, principally because it does not create debt. It is almost like an insurance against bad debts and losses. With factoring, businesses get immediate access to funds instead of waiting on delayed payments. Best of all, it is easy to establish a factoring account, and the cost is nominal. Moreover, funding is almost immediate.

In today’s economy, most customers are asking for extended terms from their vendors, but the vendors’ suppliers including employees are continually demanding prompt payments, as they should. More and more customers are paying later than usual even as producers are being pressured to pay promptly in order to obtain materials and supplies, meet payroll, and other operating expenses. This is contributing to an unprecedented cash flow squeeze and is significantly affecting business operations. It is a classic case of the effects of economic slowdown.

If your customers are paying slow and asking for extended payment terms, if you could do more business by offering extended payment terms to your customers, or if you are experiencing a cash flow squeeze for any reason, you should consider establishing a factoring account. You will be able to receive immediate payment from a factor each time you invoice, even as your customers continue to take their time to pay. You will have the capital you need to meet operating demands such as payroll, rent, buy supplies, service new customers and so on.

Your customers will benefit as well because it will enable you to provide the quality of service or products they come to expect. You can redirect and focus manpower to more important and productive tasks. Your credit line will increase with sales. Much like an unlimited line of credit, your factoring line increases in direct proportion to sales. Typically, factoring will not have any effect on existing bank lines of credit. You won’t have to bother your customers with collection calls.

Altogether, with a factoring line of credit, you may be able to avoid loans and other financing options that could restrict your independence, control, and ability to operate freely and efficiently. Whether you are a start-up or an already established and profitable business, you will not be subject to the typical stringent requirement of traditional lenders such as to provide:

• Minimum of three years certified record of cash flow and net profit.
• Proof of ownership of tangible assets that will maintain or appreciate in value to be used as collateral.
• Established history of increasing profits and retained earnings (Profit & Loss Statement).
• Proof of good credit and positive net worth.
• A solid business plan with positive profit projections and revenue reinvestment.
• Several years of tax returns - business and personal.

You won’t have to go to friends, family, or other investors for money. Your approval is not based on your Balance Sheet, profitability, or business experience. Rather, it is based largely on the creditworthiness of your valued customers, who ultimately pays the bills. No disrespect intended, your personal credit status is not particularly relevant in factoring. When conventional lenders say “NO” factors say, “YES” to business funding requests, regardless of economic conditions and or credit score.

Factoring is not a loan. It does not create debts and there are no monthly payments to make. Only your accounts receivable is used as collateral, leaving your hard assets free. With factoring, your Balance Sheet and overall cash position is enhanced. In fact, many astute business owners prefer factoring option to borrowing, and in many cases use it proactively in conjunction with other funding techniques as a back up. Ownership and control of your business is not affected or compromised in anyway by factoring. Factoring will actually improve management’s hands.

It is easy to set up a factoring account and it can be very fast. First, you will simply submit an application along with some basic support documents to show proof of business and ownership. Next, if you are qualified, you will be required to execute a signed and notarized funding agreement. Once approved, you can be funded within days of initial application. Subsequent funding will usually be within 24 – 48 hours each time you submit an invoice.

With factoring, our clients are able to expedite invoice payments, improve A/R management, increase sales, provide better services to customers, prevent bank denials, avoid financial aches and pains, circumvent market conditions, improve productivity, and maintain independent control and ownership. In addition to the above stated reasons why our clients factor, there are other ancillary benefits such as professional accounts receivable management, free customer analysis, continued monitoring of customer’s credit status, sales tracking, and up-to-date reports, all at no additional cost.

By providing credit support and analysis of customer’s standing, a factor may truly allay your risk of losses and alert you to potential problems. Customers are aware that factors may report payment patterns to Business Credit Bureaus, and their ability to do more business can be adversely affected by negative reports. As a result, they will begin to pay on time or early. Except in cases of outright fraud and disputed invoices, factoring can really provide surety against losses because it can completely absorb the risks of loss particularly with non-recourse factoring. Best of all, it assures peace of mind and allows all personnel, especially managers and owners to concentrate on more important things such as sales, management, and growth. A business can accelerate cash flow and generate more revenue by simply having access to tomorrow’s money today.

Some businesses are hesitant to establish factoring relationships in spite of obvious benefits either because they lack required materials and information or do not exactly see how factoring would directly benefit them. Frankly, that is the purpose of this article. To completely inform managers and owners of what factoring is, how it relates to them, and to enable them make informed decisions about it. Of course, factoring is not suitable to all businesses and it is not a cure-all. It is much like prescribed medication. If it is used properly, it can help a business to grow and be profitable. Conversely, if it is abused, the consequences can be severe.

If your business would benefit from immediate funding and improved cash flow, you should consider accounts receivable funding.