If you offer credit terms to your business or governmental customers, you can quickly obtain financing for your business without adding more debt simply by converting your aging accounts receivable into cash. The conversion tool is called Factoring. In tight credit markets, it is a pragmatic, short-term solution for the small or medium-sized business that needs better control of its cash flow. Used prudently, it can generate a continuous stream of working capital at reasonable expense.
Factoring is the purchase of your accounts receivable at a small discount by a commercial finance company. Their only restriction is that you use the money for your business—for payroll, taxes, creditors, supplies and materials, insurance, overhead, equipment, or marketing.
Offering credit to your customers is a double-edged sword. While it does make you more competitive, it could also put you in a bind if too many of them decide to delay paying you. What Factoring does is transform those "no interest" loans to your customers into "cash on delivery" transactions. Upon selling some or all of those invoices, you'd see roughly 75% of the total amount deposited in your bank account within 24 hours. The remainder less the factor's fee would follow after your customers paid their invoices.
Instead of pleading with your customers to pay you, you can move your business forward knowing that you can get the working capital you need when you need it. As your sales increase, so does the amount that could be financed. And all this occurs without degrading your creditworthiness or your balance sheet, and without your giving up any equity or control of your business.
The process to set up a revolving credit facility takes 1-2 weeks. The due diligence focuses more on the financial strength of your customers and their ability to pay, and less so with your financials and credit, or how long you’ve been in business. What’s important are the quality of your revenues, your margins, and what’s in your pipeline. If the factor is comfortable with what they see, they’ll give you the financial confidence to go after bigger customers and sales to significantly grow your top line.
Jim Harrison, CCFC
Business Capital Connections
Jim is the owner of Business Capital Connections in East Nassau, NY, and is dedicated to providing access to working capital financing to businesses during periods of rapid growth or tight credit markets. Jim is a member of the Consulting Alliance, the Albany-Colonie Regional Chamber of Commerce and the Rotary Club of Albany, and sits on the board of the Albany Rotary Foundation. He also is a Literacy Volunteer.