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Factoring Is Often The Best Solution For New And Growing Businesses
Factoring is among the oldest methods of business financing in existence. The history of factoring dates back to the days of moneylenders in the middle ages.
Factoring has been the working capital facility of choice in Europe for thousands of years. It has taken on a new life in recent years as a financing method for several businesses within the United States.
Factoring is the sale of accounts receivable, as opposed to borrowing against them as you would do with a bank line of credit. By selling your invoices, you generate instant cash flow instead of having to wait for your customers to pay.
Companies frequently find themselves in the frustrating place of having sales opportunities which they cannot accept because of the lack of financing to support those sales.
Some businesses use equity capital markets to build financial capital. Other people use business merger methods to expand their companies. A business merge can be tricky if you don't have accurate information from a good financial consultant.
Banks usually cannot provide adequate funding for growth because of internal credit policies and external regulatory restraints. Even when a business can qualify, the bank line of credit may be completely inadequate to support the company's sales growth opportunity.
Main advantages of factoring versus a bank line of credit:
- Factoring facilities are much easier to implement compared to acquiring a bank line of credit.
- Factors have a lot more flexibility with regard to documentation and credit issues than banks.
- Factoring may be initiated and terminated very efficiently. When producing a first-time purchase of invoices from a business, factors usually take one to two weeks to check the credit ratings of the customers and communicate a discount price.
- The company receives payment in cash from the factoring company after delivery and invoicing a customer. Immediate invoice payment eliminates the sale-to-collection business cycle; as a result allowing businesses caught in a cash crunch to obtain fast relief. Turnaround on the sale of receivables is approximately 24 hours.
- Factoring is a sale of assets (invoices), not a loan. For businesses that either cannot qualify for traditional debt financing or that simply don't want to incur more debt; factoring is a good alternative means of funding working capital.
- Factors purchase all rights in the invoices as well as the seller has secondary liability for any invoices not collected.
The factors undertake debt collection, but the business remains ultimately responsible to settle any portion of the cash price attributable to an account that went uncollected. Factoring could be an effective solution to funding a short term gap in cash flow for the start-up or rapidly growing businesses.
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