Factoring Line of Credit

A factoring line of credit is a working capital credit facility that enables a young or rapidly growing business access to working capital when the business financials do not support a traditional bank line of credit.  The way it works is the lender or factoring company will evaluate the credit facility based on the credit quality of your customers as the primary risk factor in the decision process.  If you cannot qualify for a bank line of credit and have customers with established credit the factoring line of credit can provide a nice option for working capital.

How It Works

The factoring line of credit has both positive and negative things to consider.  First, just about all factoring lines of credit require full verification and full notification to all your customers.  This means your customers will be contacted by the factoring company via phone or email to verify each invoice submitted to lend against.  You will need to make sure that your customers understand that it’s a common form of financing for young companies and encourage them to work with your factor.  Many factors now allow for emailing your invoices to the factoring company instead of mailing original copies which can get time consuming and messy.  Once your invoices have been verified by the factor they then advance 80% to 90% of the total to your checking account.   Once the invoice is paid to your factor by your customers you get the remaining 20% to 10% back, less the accrued factoring fee.  When you utilize a factoring line of credit you’re basically speeding up your cash flow by converting all invoices to immediate cash instead of waiting 30 to 60 days to get paid.

Cost of Funding

Another negative is the cost of financing.  Most factoring line of credit deals will range from 1 to 3% per 30 day period in the form of a discount fee off the invoice.  This means you’re paying a percentage of the total invoice, not a traditional apr interest rate.  If you take the time to convert this expense to an apr interest rate you’re looking at 12% to 50% apr interest in most cases.  Most companies that use the factoring line of credit add a few percentage points to what they charge customers.  If your able to do this you can often offset the higher cost of factoring.  Careful consideration of this funding expense is needed to ensure the expense of the working capital can be made up in additional growth and profit for the business.

Positives for Factoring Lines of Credit

The upside for the factoring line of credit is the ease of approval and the available working capital.  Factoring companies evaluate a business looking into the future when making credit decisions, instead of focusing on the present and past performance like banks.  This allows young to rapidly growing companies to tap into unlimited working capital as long as the customer base and future companies have reasonable credit quality.  If you have the ability to expand your business, but need working capital the factoring line of credit could be the best solution for your company.

What Industries Fit Best for Factoring?

The most common industries serviced by factoring companies are below.

Trucking – Manufacturing – Distributors – Staffing – Tech Consultants - Oil and Gas Services – Import/Export – Cell Tower Companies – Solar/Wind Power – Construction Services

Basically, the best fits for the factoring line of credit is business to business companies that do not have any progress billing.  Any business that sells to consumers would not be a fit as factoring companies usually only lend against reasonable credit quality business to business invoices.  If you feel factoring can help your business and would like up to 5 rate quotes please use the easy funding quote application on the right side of this web page.

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