The Facts on Receivables Factoring:  

 Oh, the Irony… Factoring has an ironic distinction: It is the financial backbone of many
of America's most successful businesses. Why is this ironic? Because receivables factoring is not
taught in business colleges, is seldom mentioned in business plans and is relatively
unknown to the majority of American business people. Yet it is a financial process
that frees up billions of dollars every year, enabling thousands of businesses to grow and prosper.

Factoring account receivables has been around for thousands of years. Factoring companies are investors
who pay cash for the right to receive the future payments on your invoices.
An unpaid receivable or invoice has value. It is a debt your customer
has agreed to pay in the near future.

Cash flow is one of the main reasons businesses fail. At one time or another, every business,
even successful ones, have experienced poor cash flow. Cash flow does not have to be a problem any more.
Do not be fooled -- banks are not the only places you can get funding. Other solutions are available and you do not have to borrow.
One solution is called receivables factoring.

What is Factoring?

Factoring is the process of selling accounts receivable
to an investor rather than waiting to collect the money from the customer.

Generally, a business that extends credit will have 10 to 20 percent of its annual sales
tied up in accounts receivable at any given time. Think for a moment about how much
money is tied up in 60 days' worth of receivables: You cannot pay the power bill or this
week's payroll with a customer's invoice, but you can sell that
invoice for the cash to meet those obligations.

Factoring receivables is a fast and easy process. The factor buys the invoice at a discount,
usually a few percentage points less than the face value of the invoice.
 

Factoring Principals
Although account receivable factoring deals exclusively with business-to-business transactions,
a large percentage of the retail business uses a factoring principal. MasterCard, Visa, and American
Express all use a form of factoring in their retail transactions. Using the purest definition of the word,
these large consumer finance companies are really just large factors of consumer paper.

Think about it: You make a purchase at Sears and charge it to your MasterCard.
The store gets paid almost immediately, even though you do not make payment until you are ready.
For this service, the credit card company charges Sears a fee (typical fees range from two to four percent of the sale).

The Benefits Receivables Factoring can offer many benefits to cash-hungry companies.
Rather than wait 30, 60, 90 days or longer for payment on a product or service that
has already been delivered, a business can factor (sell) its receivables for cash at a small
discount off the amount of the invoice.

Payroll, marketing efforts, and working capital are just a few of the business
needs that can be met with this instant cash.

Factoring invoices provides the means for a manufacturer to replenish inventory and
make more products to sell: There is no longer a need to wait for earlier sales to be paid.
Factoring is not just a cash management tool for manufacturers:
Almost any type of business can benefit from factoring.

The Drawbacks
People consider the receivable factoring discount a small cost of doing business.
A four-percent discount for a 30-day invoice is common. Compared with the problem of not
having cash when you need it to operate, the four-percent discount is negligible. Look at the invoice factoring company's 
discount as though your business had offered the customer a discount for paying cash. It works out the same.

Companies consider the discount the same way they treat a sales price: It is simply the
cost of generating cash flow, much like discounting merchandise is the cost of generating sales.

Receivable factoring is a cash flow tool used by a variety of businesses, not just those who are small or struggling.
Many companies factor to reduce the overhead of their own accounting department. Others use factoring to
generate cash, which can be used to expand marketing efforts and increase production.

Why Invoice Factoring Appeals to the Start-Ups
Factoring is especially appealing to young and rapidly growing companies.
Since the process shortens their business cycle, these businesses can grow faster.
The ability to make more products to sell while waiting for invoices to be paid is largely eliminated.
Such businesses usually net much more profit with factoring than without, even when the discount is considered.

Factoring vs. Bank Loans
So, why not simply go over to the friendly banker for a loan to alleviate
cash flow problems? A loan can be difficult if not impossible to receive, especially for a young, high-growth operation,
because bankers are not expected to decrease lending restrictions soon.
The relationships between businesses and their bankers are not as strong or as dependable as they used to be.

The impact of a loan is much different than that of the receiavbles factoring process on a business.
A loan places a debt on your business balance sheet, which costs you interest.
By contrast, factoring puts money in the bank without the creation of any obligation.
Frequently, the factoring discount will be less than the current loan interest rate.

Loans are largely dependent on the borrower's financial soundness, whereas factoring is more
interested in the soundness of the client's customers and not the client's business itself.
This is a real plus for new businesses without established track records.

There are many situations where factoring can help a business meet its cash flow needs.
It provides a continuing source of operating capital without incurring debt, which can result
in growth opportunities that dramatically increase the bottom line. Virtually any business
can benefit from factoring as part of its overall operating philosophy.

Every good businessperson must understand the concept and benefits of accounts receivable factoring
in order to operate as profitably as possible.