Businesses often need more cash than they have on hand. It may be for an emergency, a fleeting opportunity or, sometimes, such ordinary events as a payroll to meet.
How to be prepared and avoid a cash-flow squeeze? Short of having an ATM in-house, many firms are using what once was a controversial way of obtaining quick money.
It’s called factoring, and it’s based on a simple idea. A business sells its invoices or accounts receivable to a firm that specializes in collecting their payments. That firm, called a factor, advances most of the invoiced amount — 70% to 90% is common — to the business after checking out the credit-worthiness of the billed party. After the bill is paid in full, the factor remits the balance to the client, minus a transaction, or factoring, fee.
The process can be swift. Once the factor is satisfied that he or she will be paid, money from an invoice can be in the hands of the issuing client within 24 to 48 hours. Indeed, for many businesses, the biggest attraction of factoring is not being held captive by slow-paying customers.
“As a subcontractor for glass and glazing on construction jobs, we’d have to wait 30 to 60 days for our money,” says Theresa Woods, controller at Metropolitan Glass Systems Inc., a Tampa concern. So her company began using AmeriFactors Financial Group, based in Celebration, Fla., to collect its bills. “We’d get our money on the spot,” Ms. Woods says.
Help at the Start
Some businesses use factoring to get started. Because it is the financial soundness of their customers that most concerns a factor, firms with scant history can nonetheless sell their invoices. “We weren’t profitable then, so didn’t qualify for bank financing,” founder Alton Johnson of Bossa Nova Beverage Group says of the juice maker’s early days.
While Mr. Johnson says venture capital was a possibility, he decided that even with factoring’s higher interest rates, paying them was preferable to selling part of the company. Factoring got the Los Angeles firm through a critical start-up and growth period, he says.
Although it has helped many businesses get on their feet, some that have factored accounts receivable to meet their cash-flow needs say they viewed it as a stopgap measure.
“It’s something we will wean ourselves from over time, as we’re able to establish other funding — which we’re working on,” says Jeff Brain, chief operating officer of SFGL Foods Inc., a Glendale, Calif., concern that markets seafood gumbo and other items under the Smokey Robinson brand.
Perhaps chief among factoring’s drawbacks is its cost. A factor may charge several percentage points more than a conventional lender.
