Working Capital Alternative
Factoring is one of the oldest forms of commercial finance with its roots traced back to ancient Babylon and the Code of Hammurabi. Today, American Factors provide over $130 billion dollars annually to finance domestic receivables. It is the most powerful form of accessible business finance available providing entrepreneurial capital to fast growing, start-up and first-stage companies.
In spite of its size, however, many small and mid-size businesses are still unfamiliar with its fundamental applications and the basic reasons for its incredible revenue-flow power. Simply put, factoring is a method of financing your customers terms of payment. Though when marketing, you can still offer very attractive terms of payment (30 days or even longer) to attract new and larger accounts. Factoring will provide your business with systematic advances on the future payment due upon your invoices, easing cash-flow constraints and working capital shortages.
Unlike traditional banks, factors do not lend money. Instead, they purchase short-term commercial trade debt (your invoices) for services provided by you or merchandise delivered. Typically, factors advance up to 90% of the face value of your purchased invoices, holding the balance in temporary reserve.
Upon collection of the purchased invoices (when your customers ultimately pay under their normal terms), your factor will remit the reserve (that portion of your invoices not initially advanced upon) to you, less the factor's servicing fee and any chargebacks for those invoices where no payment has been received by the chargeback or recourse date (usually 90 days from the invoice date or advance date).
Factoring is not a method used for the collection of bad debt. In fact, because they are not traditional lenders, factors judge their ability to provide financing to your company on the creditworthiness of your customers, not you. This is why factoring can be so valuable to start-up and first stage companies that have not yet been in business long enough to establish bankable track records compatible with the strict lending requirements of commercial lending institutions.
| |
|
