Historically, factoring has not been well known especially among small business owners.
Factoring now accounts for more than $1 trillion a year in business funding. That is more than three times what it was in the early 1990s. Since then, factoring companies have become more reputable and service oriented while providing readily available funds to businesses that are challenged with cash flow issues.
Although factoring has not generally been well known in the past (except in a few specific markets like textiles and transportation) it has recently become a sought-after cash flow management tool for the small to mid-sized business (SMB) market across many industries. This is recently, in a large part, due to big companies slowing their payment to small businesses (see article “Big Companies Are Slowing Supplier Payments”) creating severe cash flow problems for these smaller suppliers.
For those unfamiliar with Invoice Factoring, it is the process of a business acquiring cash by selling its accounts receivable (invoices) at a discount to a factoring company. The discount, or cost to the business is equivalent to a prompt pay discount a business might otherwise offer to a customer account . The business receives the cash upfront from the factoring company and the factoring company takes responsibility for processing the receipts under lock-box control. It can take time to collect on an invoice, so when a company factors its accounts receivable, the company essentially gets its funds up front while the factor manages the process of collecting the payment remittances — saving the company time, money and positive cash flow.
Factoring allows the small business owner to retain control of their company and gives them the ability to grow quickly or at a moderate pace. It is all about control and cash flow management. More savvy business owners will work the factoring fee into the product or service provided. Others use the extra cash to take quick-pay discounts from suppliers by paying early. With the right financial strategy, factoring can also provide long term cash flow management, not just a quick fix.
As more and more small businesses discover the benefits of factoring, new industries are warming-up to the idea that there is a readily available source of cash hidden within their accounts receivable. In fact, factoring has become so much a normal part of business financing, that universities are now teaching it in relation to cash flow management.