Factoring is one of 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 centuries. It has taken
on a new life in recent years as a financing method for many
businesses in 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 immediate cash
flow instead of having to wait for your customers to pay.
Companies often find themselves in the frustrating position of
having sales opportunities which they cannot accept because of
the lack of financing to support those sales. Banks normally
cannot provide adequate funding for growth due to internal
credit policies and external regulatory restraints. Even if a
business can qualify, the bank line of credit may be totally
inadequate to support the company's sales growth opportunity.
Primary 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 more flexibility with regard to documentation and
credit issues than banks.
* Factoring can be initiated and terminated very efficiently.
When making a first-time purchase of invoices from a business,
factors typically take one to two weeks to check the credit
ratings of the customers and communicate a discount price.
* The business receives payment in cash from the factoring
company after delivery and invoicing a customer. Immediate
invoice payment eliminates the sale-to-collection business
cycle; thus allowing businesses caught in a cash crunch to
obtain fast relief. Turnaround on the sale of receivables is
only about 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 do not want to incur more debt;
factoring is good alternative means of funding working capital.
* Factors purchase all rights in the invoices and the seller has
secondary liability for any invoices not collected.
The factors undertake debt collection, but the business remains
ultimately responsible to repay any portion of the cash price
attributable to an account that went uncollected. Factoring can
be an effective solution to funding a short term gap in cash
flow for the start-up or rapidly growing business.
About the author:
Dave Nighswander is the President and Founder of Capital Access,
a business factoring company specializing in factoring accounts
receivables, working capital, and cash flow solutions for
businesses across the country. For more information on Capital
Access, please visit http://www.capitalaxcess.com or call (419)
732-3174.
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