Houston Business Journal Article Endorses Factoring
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
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,
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
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
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
• 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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