“Factoring” is especially appealing to young and rapidly growing companies as cash flow is predictable and steady. The company receives the money right away and the factoring company waits for payment.
“Factoring” is a popular way to obtain financing without adding any debt to the balance sheet. With Factoring a company sells its accounts receivables to a ‘Factor’, which is a financing company that buys receivables at a discount. The company gets money almost immediately, within 24 hours in some cases, compared to the 30, 60 days or longer it usually takes for customers to pay.
Upon receipt of the invoices the Factor pays the company an advance of between 70 per cent and 90 per cent of the face value of the invoices. When the customers pay, the Factor pays the company the balance, minus its fee.
Fees range normally between two to five per cent of the invoices, depending the customers creditworthiness, average invoice size and total dollar volume. Factoring is more expensive than most other forms of finance, but the company is able to service new contracts/orders that it would otherwise have to pass on. It also saves by not having to do the credit functions. This easily justifies the costs.
Factoring doesn’t add debt to the balance sheet, thereby keeping the company’s credit facilities intact. Eventually the company will be become completely self-financing, as the working capital increases. Factoring agreements usually last from 1 to 3 years.
Benefits • An immediate cash flow increase.
• The ability to meet your bills and demands.
• No waiting for invoices to be paid so that production can be increased or inventory purchased.
• Some factoring arrangements allow you to reduce or eliminate your accounts receivable department. This could more than offset the fee charged by the factor.
• The potential to eliminate the risks and expenses of bad debt.
• No additional debt added to the balance sheet Factoring has been around since the Mesopotamians came up with the concept 4,000 years ago. The first widespread, documented use of it in North America occurred in the American colonies down south before the revolution.
For more information on Factoring or other Business Financing options contact:
Ray Ellis, BFC AAray Financial Group Phone: 905-877-9718 Email: busifinan@aarayfg.ca
This is second of a series of articles that will explain in more detail the different types of Business Finance Options that are available. I hope that you found it informative and will read the remaining articles in the series as they become available.
Cash Flow Solution – Factoring - To learn more about this author, visit Ray Ellis's Website.
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