Today in America, domestic factors provide over $125 billion in financing to small and large businesses alike. In spite of its power and size, however, it is one of the least understood methods of business finance.
- Funds wire
transferred to your bank account
within 24 to 72 hours
waiting 30 to 90 days for payment
existing lines of credit
business growth/expansion without
adding new debt
capital without regard to your
continuous source of cash as your
advantage of cash discounts on your
bills for early payment
- Pay vendors/purchase raw material
Here is a simple Factoring Case Study that demonstrates how one company effectively used this form of alternative financing to grow their business without taking on additional debt.
HOW IT WORKS
As a source of business finance, factoring has no equal. It is the most immediate, readily available, and powerful method of providing working capital to growing businesses. Unlike traditional methods of bank finance, however, true factoring is never in the form of a loan.
In factoring arrangements, a finance company (known as the "factor") purchases accounts receivable from a company (known as the "client') for immediate cash. This has the effect of "freeing up" a company's working capital that is "trapped" in its accounts receivable because of the necessity of granting liberal "terms of payment" to the client's customers.
Modern factors are extremely flexible and generally offer several methods or programs to customize financing for their clients. As a ready source of business capital, factoring provides:
capital for payroll....for
businesses required to offer
30,60,or even 75 day terms of
payment yet must pay employees
weekly or bi-weekly.
opportunities for supplier
discounts....factoring your accounts
receivable allows you to pay your
suppliers earlier, taking discounts
for such early payments.
building....for young companies with
short credit histories, initial
factoring relationships can be an
important key to obtaining adequate
traditional bank capital at a later
- credit leveraging....because factors primarily focus on the creditworthiness of your customers, young businesses can leverage their available working capital and credit by employing factoring as their primary source of funding.
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.
US Business Finance employs the advance/reserve method of factoring whereby a client will send his/her original invoices to be immediately purchased.
After quickly verifying the authenticity of the invoices, the factor will create an advance schedule that will be faxed to the client to determine its accuracy and for assignment. After return of the advance schedule, the client generally receives payment for invoices directly wire transferred into his/her business account.
purchased invoices typically run 75-85%
of their face value with the balance
remaining as a reserve to offset against
any uncollectible invoices. After
successful collection, the factor
periodically remits the reserve balance
to the client but first deducts its fees
for services or discount.
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