Factoring Strategy

One method for raising quick cash used to be available only to large companies. It's called factoring, and it entails selling accounts receivable at a discount to a company called a factor, which then collects the accounts. The factor makes money on the difference between the discounted price it pays for your receivables and the money it collect. You then benefit by receiving payment much more quickly than the normal time it may take a customer to pay his account balance. Today, because of changes in the factoring industry, small and medium-sized businesses can take advantage of this financing strategy, just as larger companies have in the past. Factoring is a way to turn a company asset, accounts receivable, into immediate cash without creating new debt.

Normally, it takes only a few days to set up an account with a factor. Factors will often advance 50 percent to 80 percent of the face value of the receivables to you immediately. They will then pay the balance, less the factor?s discount, once the receivables are collected. On high quality receivables they may advance 100 percent of the receivable less the percent of discount.

For example, here's how it will work at Weather-Bos™ Midwest; a Dallas, TX factor by the name of ABC Factoring agrees to buy their $10,000 invoice to XYZ Co. ABC Factoring advances $8,000. On collection of the $10,000 from XYZ Co., ABC factoring pays the balance of $1,500 and retains $500 as its fee. Only companies that do business with other businesses or with government clients at the local, state, or federal level are eligible. Any Weather-Bos™ manufacturer is a strong candidate for factoring, if you sell to major companies that have good credit, as well as a national presence in the retail market.

The disadvantage of factoring is that it costs money. According to most estimates, discounts may range from 1.5 to 5 percent of the face value of the receivables, again depending on your stability, as well as the creditworthiness of your customers. The advantage obviously, is that the factor will assume the risk of bad debt, and many other variables.

Also on the plus side, you don't give up equity in your company when you raise money this way, and the factor provides constant monitoring of your customers' credit status, along with other services. In addition, factoring can work for expanding your business, which generates the growth that will increase your profits.

Before entering this kind of relationship, be sure the factoring [costs] don't adversely effect your net profit. In other words, you must be sure and build into your wholesale prices the necessary cost of factoring as well as any other capital costs. It is also advisable to first check a prospective factor's references and its reputation among current clients before committing your customer accounts to them.

In order to raise capital it is not necessary to choose between a bank and a factor because they often work together. In fact, "factors can be your ally in helping you create a very strong financial picture." The Edwards Directory of American Factors provides information on factoring and lists more than 200 factoring firms around the country, It is available at some libraries, or it can be obtained for $250 plus $7.50 shipping form the Edwards Research Group, in Newton, Mass.; to order, call 1-800-963-1933. In addition, most all telephone yellow pages have a specific classification titled "Factors" which provide those companies located closest to your individual area.


For a free copy of the paper "Ten Frequently Asked Questions About Factoring," send your request with a self-addressed, stamped envelope to at IBC Funding, 3705 Ingomar St., N.W., Washington, D.C. 20015.

You can also call up one such company, Coastline. Their home page answers many of the most frequently asked questions on this subject.

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