Factoring Your Small Business Receivables

By Karlene Sinclair-Robinson

Over the years I have asked business owners, “What do you know of Factoring?” Many times the answer is “I have never heard of it”. For those who answered, “I know little about it”, this is for you, too. Factoring your small business receivables is when you sell your invoices. This is considered the sale of an asset at a discount.

This notion of sales has been around for ages. In today’s market, this non-traditional form of financing is keeping many businesses both large and small afloat. Understanding this concept of business financing can take some time. If your business operates without invoicing your clients and waiting to get paid, then this is not for you. For those businesses who allow their clients to pay them on terms, such as pay 30 days, then this could be for you.

Traditionally, most small business owners will go to their banks when they need to access capital. With today’s tight lending due to credit constraints, many of these small businesses are not able to get the necessary capital they need. Banks are unable to finance these business owners’ requests based on a number of reasons. Many will say banks are not lending but that is not really the case. It is the case that many entrepreneurs cannot qualify for traditional bank financing.

This is where factoring as a financing option can play a major role in your small business. If you are a government contractor or doing business-to-business transactions, this is one type of financing that can be beneficial to the growth or survival of your business.

Business Growth – During periods of explosive growth, businesses cannot sustain this increased demand for products and/or services without some outside help. Banks are often not able to facilitate such rapid growth. Here are some growth issues that factoring could solve:

o Increased Payroll
o Larger Purchase Orders
o Increased Production
o Opening New Markets

Business Survival – Surviving through down-times is important as your staying power will be tested. Being a savvy business owner will get you through these tough times. You can come out ahead if you identify these obstacles and the solutions to solving them:

o Pay Taxes
o Unexpected Expenses
o Payroll
o Credit Rating

Factoring your small business receivables gets money into your bank account in less time than it takes to wait 30, 60, or 90 days to get paid. Understanding the “Time Value of Money” will keep you in business. The sale of your invoices allows you to receive money much earlier than the time it takes your clients to pay their bills. On the other hand, your clients pay the invoices at the 30, 60 or more days.

With this financing concept, there are three (3) important factors to consider:

Creditworthy Clients – In order to make this financing option work for you, you must be doing business-to-business or business-to-government transactions. It is all about “Who is Guaranteeing Payment”. If your clients have good paying habits, even if your credit and company’s business credit is not high, it is vital that you are doing business with creditworthy clients.

The Advance – Is the initial upfront amount you receive from the funder. When you sell your business invoices (receivables) the financing source will advance this portion of the invoices. The advance rate could be as low as 60% to as high as 90% of the face value of invoice. This range is based on a number of factors but primarily the industry type plays a big role here.

The Reserve – Is the balance after the payout of the Advance. The financing source will await payment from your clients based on the factoring process. Once your client pays, the financing source will subtract their fees. They will then transfer to you the balance.

With the above information, determine if this non-traditional form of financing will work for you. If it is, do take advantage of factoring your invoices. Before you eliminate Factoring as a financing option, learn all you can, then you can make a sound decision.