Get the Facts on Factoring



Business owners who suffer from a cash flow crunch sometimes look at their folder of unpaid invoices as a way out of their problems. By selling unpaid invoices to a factor company, they can inject needed cash into their business and meet some important short term needs. Still, factoring is not without its risks. It’s important to know the pros and cons before making your decision.

Businesses that pursue a bank loan will often have to put up collateral and prove their business has a steady cash flow plus a degree of existing capital. If you suffer from a poor credit history, have no collateral, or lack past customers to vouch for your business, you are likely to be declined. Factoring your accounts receivable can be a viable option, as a factor company is more interested in the invoice’s value. And since your customer is the one who is indebted to pay the invoice, the factor will focus on their creditworthiness above yours. Dealing with a factor can also get you cash more quickly than a traditional loan. You may receive cash upfront in five to ten days, or even sooner.

While going to a factor company can present immediate benefits, it is important to know the drawbacks. First, unlike the commercial lending sector, factoring is a fragmented and largely unregulated industry. You’ll have to examine closely who you want to work with. Check their Better Business Bureau ratings. See how long the factor has been in business. Look into any outstanding lawsuits against the factor. And check for reviews of the factor company.

As always, examine the fine print. A good contract will spell out a clear beginning and end to your relationship with the factor. The length of your arrangement should be long enough for the factor to receive payment on the invoice. Make sure the term of the relationship is not unnecessarily long or puts additional obligations on you. Also look at the fees you’ll be paying. You can expect a service fee and an interest fee until the invoice is paid. Be aware of any overdue fees you may have to pay if your customer is late on a payment. This could also increase your APR. Other fees can include an application processing fee.

Like traditional bank loans, SBA loans, venture capital, or personal investment, factoring is just one of many ways to get capital for your business. Knowing the facts about factoring will help you make an informed choice and best benefit your company.