What is Factoring?

Factoring is the sale of accounts receivables at discount for immediate cash. Most non-retail businesses sell products on terms and hence have accounts receivable. Rather than having to wait to collect on these accounts receivable, factors will purchase the accounts and collect the invoices. Factors charge a fee based on several factors including the time the invoice is outstanding.

Factoring is NOT a loan. No money is loaned and no interest is paid or earned. Instead, the factor receives a fee for its services. Those fees are based on the dollar amount of the accounts receivable purchased. A main difference between factoring and a bank loan is in factoring you use your customers' credit strength, not yours, as support for fundings. Whereas a bank loan, which is typically based on your assets, equity, profitability, cash flow, and liquidity, can limit the amount of funding. Under a factoring facility your available funding is virtually unlimited, allowing you to meet operating demand and provide for future expansion.

Why Factor?

The most common attribute of companies that factor is that they are non-bankable, at least temporarily. In order to become bankable, a company must be able to comply with the bank's underwriting requirements. This may take a significant amount of time and effort. During the interim, factoring can resolve many timing problems by providing needed capital.

As a factor we are ultimately concerned that our client's customers will pay. Factoring provides funding against eligible accounts. There are no artificial limits to factoring and as long as your customers qualify, you can continue to focus on your business and growth opportunities.

History of Factoring

The history of factoring goes back to ancient Egyptian and Greek times and is older than our modern system of banking. Our current form of factoring evolved in the garment industry during the 19th century and has been expanded to other industries over time. Until the 1980's, large companies were the primary users of factoring. Since the financial crisis during the 1980's, factoring has been made available to even the smallest companies that may not qualify for traditional bank financing.

Factoring has the distinction of being the financial backbone of many of America's most successful businesses. While factoring is not taught in most business schools around the world, it is used in practice on a daily basis in the form of credit card purchases. Aside from credit cards, factoring is relatively unknown to the majority of America's business people, yet it is a financial process that frees up billions of dollars every year, enabling tens of thousands of businesses to grow and prosper.

Reasons Businesses use Factoring

The reasons businesses use factoring vary, but some of the most common reasons are to:

Benefits from Factoring

Factoring can be very beneficial provided it is used as a tool for growth. Many companies stall at a given revenue level due to their inability to fund their growing working capital needs. Unfortunately, the most profitable sales are generally those incremental (or marginal) sales that are missed once the initial fixed costs, i.e. rent, base salaries, insurance, etc., are covered. If a company is precluded from making those additional sales due to a lack of cash flow, then it is unable to grow and realize those higher profit margins. The lost profit on additional sales generally outweighs the cost of factoring. This is one of the reasons we like to work with businesses that possess sufficient margins to benefit from our services.



Common Knowledge

Common knowledge among finance professionals is that an average business person usually learns the hard way is that "The Growth is Expensive". Most naive business people believe that strong revenue growth is the cure for all problems. However, strong revenue growth creates a host of cash flow issues. It is common to see a young company with a great product outstrip its capital base and become insolvent. Because banks rely on cash flow from operations for repayment, they are usually a poor source for funding high growth and early stage companies. High growth and early stage companies by their nature generate negative cash flow. Equity tied up in accounts receivable is usually poor collateral for a bank, but is extremely valuable to a factor.



Good Candidates

Is factoring for everyone? No Way! There are numerous situations when factoring simply does not make sense. But when it does make sense - it can be a lifesaver. Factoring candidates typically have some of the following characteristics:

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