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I Don't Need Factoring. Or Do You?

Factoring is actually one of the oldest & most established forms of financing in the world. This post lists several attractive benefits of factoring.

When they hear the term “factoring,” many business owners think of a last-resort financing vehicle that they should only consider if all other financing doors are closed to them. In reality, this couldn’t be further from the truth.
 
Factoring is actually one of the oldest and most established forms of financing in the world, dating back to the Roman Empire. Today, companies in a wide range of different industries use factoring to access much-needed funds, accelerate cash flow and improve accounts receivable management. Startup and fast-growth companies, in particular, are often good candidates for factoring, since it can be difficult for such companies to fit within the parameters of a bank’s traditional loan underwriting criteria.
 

 

How Factoring Works

With factoring, companies sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount. The amount of the discount (or factoring fee) depends on several different factors — including the credit risk of the debtor, industry risk, number of days the funds are in use and size of the transaction. Typically, discounts range from two percent and five percent. The company will receive an advance of most of this amount (usually around 80 percent) and the balance after the receivable has been collected, less the discount.
 
Factoring offers several potentially attractive benefits to businesses:
  • Improved cash flow — In some industries, businesses have to wait 60, 90, even 120 days or longer to receive payment for invoices, which can put a serious strain on cash flow. With factoring, the business receives most of the accounts receivable when the invoice is generated, shortening the cash flow cycle by weeks, if not months.
  • Outsourced credit analysis and collections — The factor performs all the services that are typically handled by a company’s accounts receivables department, including mailing and documenting invoices and payments. It also performs credit checks on customers and analyzes credit reports to uncover bad risks and set appropriate credit limits — essentially serving as the business’s full-time credit manager.
  • Access to working capital — Companies that are new and cannot yet demonstrate a history of profitability may not qualify for a traditional bank loan or line ofcredit. The same goes for companies that are growing rapidly and those that have experienced losses in the recent past. Factoring enables such companies to obtain the working capital they need to keep their operations running smoothly. 

 

When Factoring Makes Sense

As mentioned, factoring is often a viable financing option for startup and fast-growth companies and those that have recently experienced losses, since such businesses may not be able to receive a traditional bank loan. It also makes sense in industries where large customers insist on extended payment terms from vendors, like big box retailers that pay vendors and suppliers after 90 or even 120 days.
 
In some industries, factoring is the preferred method of financing. Trucking, textiles and apparel, food and beverage, staffing and manufacturing are a few industries where the use of factoring is commonplace.
 
If you need short-term financing to plug cash flow gaps or boost working capital, it might be worthwhile to take a close look at factoring. This historic form of financing could hold the key to meeting your financing challenges.
 
Please contact a Cadence Business Banker if you have more questions about factoring and how it could help meet your financing needs.
 
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.


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