Houston Business Journal Article Endorses Factoring

A Houston Business Journal article (shown below) has some great information for small businesses about factoring.

Financing factor: Selling receivables can smooth cash flow woes

Houston Business Journal - February 6, 1998

Congratulations, you've landed a big client. Before you can get paid though, you need to deliver the goods. But how can you do so if you don't have the money to hire the people or to buy the equipment to attain your goals?

Ill-timed cash flow is a problem businesses face everywhere, particularly start-ups that find it impossible to get bank financing. While you might be able to self-finance your way through the dry times, not everyone is able, or willing, to throw tens of thousands of dollars of receivables on their credit cards. But who wants to turn down a gargantuan account with a huge profit margin simply because you don't have the working capital to do the job?

One way out of this Catch-22 is factoring, a seldom-discussed but oft-used means of managing your receivables. It operates on the same principles as a credit card company. Factoring companies play the part of the credit card company, paying you (the credit card merchant) for services bought by your customers (the credit card holder).

How this works: factoring companies will essentially buy your receivables, paying you between 70 cents to 85 cents for each invoiced dollar. The rest of the invoice payment is kept in reserve, or "hold-back."

The factoring companies then administer collection, freeing you from badgering your customers for payment. When the factors collect, they pay you the balance of the invoice, keeping a percentage as their fee. This fee -- usually between 3 percent to 5 percent of the total money owed -- varies depending on how much money is owed, how long it takes your customers to pay, and the creditworthiness of your customers.

Factoring works well for small businesses and start-ups because the factoring company is investing not in you -- which they might perceive as risky -- but your customers. A bank may turn you down for being too small, but to a factor, as long as your customers have a solid reputation and good credit, your credit or company size is not an issue.

While you can look in the Yellow Pages under "factoring" to start your search, a safer bet is to call your bank for a recommendation. You might also want to seek recommendations from your industry's trade associations or local business chamber of commerce.

When choosing a factor, pay attention to the collection process in addition to the terms you negotiate. Don't risk upsetting customers that encounter an overly aggressive collections process. In particular, ask how late payments are handled. References, as long as they're in a similar industry, are often a terrific source for an accurate depiction of the process.

Once you begin factoring your receivables, the first set of invoices you factor will take about a week to process. Subsequent processing will take less time; some factoring companies even offer 24-hour cash turnaround.

Factoring is not for everyone. This method is more expensive over the long haul than a flat 10 percent interest bank loan. But for businesses whose lack of cash may spell business failure, turning to factoring, even for a short period of time, can be a financially savvy move.

Quick tips
• Not everything needs to be factored. It can be more cost-effective to factor only some invoices than to hand over all your receivables.

• Don't restrict yourself. Some factors will require that you work with no other factoring company. Find out about any exclusivity requirements up front.

• Know who you're talking to. Sometimes a factoring broker will play the part of an actual factoring company. Ask directly to make sure, and don't use a broker if you don't want to.
 

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