Factoring Receivables

Factoring receivables is the process of selling your invoices for immediate cash. Technically it is not a business loan, but works similar to a business line of credit for the business. Most business owners need to provide business to business customers payment terms. Normally these terms are net 30, net 45, or net 60. This means your product or service sold is performed by your business, but no payment arrives from you customer for 30 to 60 days. This leaves a substantial cash flow gap for a small growing business. Receivables factoring eliminates this cash flow gap by providing the cash for the invoices the day they are generated so the 30 to 60 day wait for funds is eliminated.

We look at invoice factoring or factoring receivables as a working capital solution if your business does not qualify for a line of credit. The reason it’s more expensive in most cases then using a line of credit. The equivalent interest apr on a factoring deal is normally 12% to 50% apr. when comparing to using a line of credit. Cost of funds on a line of credit range from 3% to 12% apr. so you can see it only makes sense if the line of credit is not an option for you. The other issue is your customers will know your factoring as they need to be notified by the factor that you’re using a factoring firm and they need to send payments for invoices direct to the factor. Most companies see this often, but it’s something you need to consider when looking at receivables factoring.

Who should consider factoring receivables?

  • start ups or in business under 3 years
  • business owners with poor personal credit
  • business with losses or little profit history
  • any business turned down by a bank for line of credit
  • profit margin must be over 20% to absorb the cost of factoring
  • business with poor or limited financial reporting data

One nice feature about factoring is the receivables factoring company will put most of the decision criteria on the credit quality of the customers you have. So in theory you’re leveraging your customer’s credit quality to obtain working capital for your business.

Businessfinanceapp.com has over 50 factoring firms in our network and we recommend that you talk to at least 3 factoring firms to compare rates. Rate structures very tremendously in this industry so do your homework and make sure your getting the best possible deal structure. Our loan matching technology will ensure that only receivables factoring firms that fit your needs will contact you with factoring rate quotes.

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