Factoring May Be the Solution

Factoring, or selling accounts receivable at a discount, is an alternative to borrowing money in order to meet current business needs.

Factoring may be the solution for companies experiencing tremendous growth, cash flow problems, tax problems, or difficulty meeting payroll. Companies needing capital for facility expansion and equipment purchases can also benefit.

An account receivable is an asset like other business assets and can be sold if you provide goods or services to creditworthy businesses or governmental agencies. A factor advances funds against invoices, typically 70 to 80% of the invoice face amount. The remaining balance is held as security for repayment of the invoice. Upon payment of the invoice, the balance is released, minus the factor’s fee. Fees usually range between 2% and 6% of the total invoice amount. Typically, the discount fees charged depend upon how long the invoice remains outstanding, the size of the invoice, and the volume of invoices the factor expects you to sell on a monthly basis. The creditworthiness of your customer is key in determining whether or not a factor will purchase a particular receivable.

While factoring is more expensive than traditional financing, the benefits of selling your receivables include funding without incurring new debt, availability of capital without regard to your credit rating or balance sheet, expanded growth capacity, and credit analysis of prospective customers.

When used wisely, factoring can be an invaluable tool to help a business maintain its position in less than favorable times, or to propel it to the next level of profitability and growth.

Lisa A. Haenisch

(Written for Texas Center for Women's Business Enterprise, Newsletter June 2000)

For more information on factoring, or other financial products available to businesses, contact Lisa A. Haenisch at American Business Capital: (512) 891-6111, or e-mail her at Lisa@AmericanBusinessCapital.com.