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Knowledge Centre  –  Category: Factoring
Factoring:
Cash Flow Solution
For The 21st Century
Cash Flow Is King!

Cash flow, the "energy" moving in and out of your business, is the most critical item on any business priority list. Without cash, the business can't pay its bills, expand, or even remain in operation.

Most entrepreneurs know what I mean. What business doesn't experience a cash low crunch when the need to expand - to invest in growth - is hampered by the 30, 60, or 90-day cycles inherent in the accounts receivable loop? Doesn't it drive you a bit crazy when those 30 to 60 day "loans" to your customers keep your own money out of your hands?

What if you were able to get cash for those invoices immediately?

The Factoring Solution

The answer could be factoring, the most powerful non-debt solution to cash flow problems available to business today.

Factoring does for wholesale companies (selling to other companies, institutions or governments) what Visa® and MasterCard® do for retail merchants. In retail, the piece of paper you sign is called a bill of sale. In wholesale, that piece of paper is called an invoice. In both cases, that piece of paper is a "promise to pay."

Hundreds of thousands of companies nationwide use factoring as a sophisticated business tool. In some industries, such as trucking, furniture and apparel manufacturing, most companies factor as a matter of good business as well as survival.

Factoring Explained

You factor your invoices/accounts receivables, converting them into cash within 48 hours by selling them directly to a factor at a discount, much as a retail store sells its bill of sale to Visa® or Mastercard®. That provides immediate cash flow to your business rather than the usual 30-90 day delay. It creates the absolute and predictable income control you need to expand and flourish in your industry, giving you a powerful competitive edge. It also reduces overhead, as you will see.

Factoring Is Not Like Bank Loans

Unlike bank loans, factoring doesn't rely on your credit rating primarily. As you are selling your invoices/accounts receivable, (thus not creating debt), the factoring company is interested mostly in the credit rating of your customers, the payers of the invoices.

The factor is not dependent on your hard assets, bank balances, business history, tax records or credit, though he may ask for some of this. His major interest is your ability to create business and add sales.

Benefits Of Factoring

The primary benefit of factoring is that when bank loans are not available, or your credit line is maxed out, it is a sure source of immediate working capital.

Secondarily, there is no debt created, improving your credit rating and your financial statement's bottom line. It also provides bad debt insurance, as the factor assumes the liability for nonpayment of the invoice. This is sure to make your banker happy.

Other benefits include continuous cash flow, increased production and sales, cash for marketing plans, new equipment purchases, plant expansion, handling payroll or tax shortfalls, lowered overhead, and total elimination of accounts receivable maintenance and the personnel costs associated with it.

Next to the instant liquidity provided by factoring, the most valuable benefit is ridding your business of credit and collections (non-income producing activities) releasing you and your employees to focus full attention, energy and assets on production, marketing, sales and service.

Is Factoring A Solution To Your Cash Flow Problems?
  1. Are your receivables above $25,000 month, with invoice size usually above $300?
  2. Is your business sometimes short of cash?
  3. Could a better cash flow...
    • allow you the advantage of discounts and special offers?
    • generate more sales?
    • increase production?
    • increase marketing efforts?
  4. If your credit and collection efforts were eliminated, could you put more attention on production, marketing, sales and service?
  5. Would your overhead be lowered?

If your answer is "YES" to one or more of these questions, factoring may be a viable strategy for your cash flow requirements and must be explored.

Factoring Summary

Factoring is a powerful financial tool for a small or mid-sized company hindered by lack of bankability or other sources of funding. It creates the needed control over your cash flow that translates into greater production, sales and profitability. It's certainly worth a look.

Ten Major Benefits Of Factoring Receivables
  1. Full control of your cash flow strategy.
  2. No debt created.
  3. Elimination of credit and collection efforts (reduced overhead).
  4. Elimination of accounts receivable ledgering (reduced overhead).
  5. No further risk of credit losses.
  6. Improved customer relations. No further dunning calls.
  7. Sales increase levels no longer tied to financial sheet ratios; speed of sales no longer limited.
  8. Improved capacity to pay suppliers and gain cash discounts, often totally off-setting factoring costs.
  9. Improved bank balances and company credit rating.
  10. No loss of cash value due to inflation.
The High Costs Of Not Factoring
  1. Devaluation of your money due to inflation while waiting for payment.
  2. Inability to take advantage of net and volume discounts and other purchasing opportunities.
  3. Worsened customer relations due to collection efforts and dunning phone calls.
  4. Inability to expand.
  5. Cash flow planning and control skewed due to uncertainty of payment dates.
  6. Inability to increase inventory.
  7. Bad debt losses.
  8. Continuous cost of ongoing credit and collection efforts.
  9. Continuous cost of accounts receivable maintenance.
  10. Inability to implement marketing and sales plans.
  11. Lowered financial statement and bank balances.
  12. Loss of working capital.
  13. Restrictions on action due to credit line and other borrowing limits.
  14. Cost of executive and staff time fixed on non-income producing activities.
Shouldn't You Be Factoring?

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Last Updated: July 20, 2017.
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