The Role of Factoring as a Source of Funding

• Questions commonly asked about the Factoring Industry:
  
  
  1. What is Factoring?
     It is selling invoices to receive your money today, instead of waiting 30, 60 , or 90 days to be paid. Factoring is a finance management tool that does not create debt, nor does it require you to give up any ownership in your company.
     
     
  2. Is it Like a Loan?.
     No ..Unlike a loan collateral is not required, there is no interest, and no debt shows up on your balance sheet.
     
     
  3. How Does My Company Pay For This Service?
     It is paid in the form of a percentage discount, deducted after all of the invoices have been paid to the Factor. The amount of discount depends on the length of time it takes to collect on the invoices (common ranges of 2.5% to 7%).
     
     
  4. What If I Have A Service Business?
     In this case, you often have few if any hard assets, but collateral is not important to a Factor. He/She is looking for clients who have credit worthy customers (e.g., major corporations, federal, state and local governments, universities, and utility companies) -- this is the most important requirement so they are often able to help service businesses.
     
     
  5. Must I Factor All Of My Invoices And What Size Should The Invoices Be?
     No, you need not factor all .. you choose which ones you give to the Factor and it is usually done on a monthly basis. Most Factors will not accept any invoices smaller than $500 monthly, and money is open ended at the top.
     
     
  6. WHY WOULD I CHOOSE TO FACTOR?
     It will give you IMMEDIATE cash flow to have money when you need it to meet expenses during a growth period ... also to help in paying for the purchase of new equipment, to increase your purchasing power, and may help to improve your credit rating.
     

  NOTE:
  Factoring is not usually a form of capital but as soon as you have invoices, factoring becomes an option. Factoring is often an important part of the growth of small businesses during the first five years, especially if they are growing rapidly, because those are the years when cash flow might be tight... and working with a factor might just provide the liquidity you need to keep the wheels turning.

  Article written by Jeanne Manley, CFS, in connection with
  Women's Business Development Center, Chicago, IL, 6/97

  Reprinted Courtesy InvoWiz Accounts Receivable Software - www.invowiz.com.