A Guide to Small Business Factoring

How to borrow against accounts receivable to boost your cash flow

With "accounts receivable financing" a factoring company (factor) will buy your receivables for up-front cash – at a discount, of course. Factoring can provide ready funds to small companies in cash-flow-challenged industries. It's often an expensive form of financing, but for many small businesses, factoring can be a welcome bridge to survival.

Companies that typically benefit from factoring include:

1. Seasonal businesses.
2. Start-ups.
3. Undercapitalized businesses.
4. Businesses experiencing rapid growth.
5. Businesses that can't secure traditional bank loans.

 

A la carte services

If you don't need factoring on a regular basis but simply need an advance once in a while, search out a factor who offers piecemeal services.
Try: 

Test drive the Facteon factoring service, which requires no ongoing contracts and can provide cash for a single invoice or for all your invoices.

Doing the paperwork

Some factors will do far more than simply send you an advance. For instance, factors may also handle billing and collections for you, which can reduce your postage costs.
Try: 

JDFinancial.com, which works with start-ups and established businesses, is a full-service factor that acts as your credit department, bookkeeping department and collection department.

Big businesses and government contracts

If you do business with the federal government or major corporations, it's common for payments to trickle in several months after products or services have been provided. This can leave you in a cash bind and has become a major reason why small businesses are turning to factoring.
Try: 

1stCommercialCredit.com provides factoring for a wide variety of businesses and industries, including those who have federal government contracts.

Import/export factoring

Doing business with foreign countries can translate into extremely slow payments. Avoid cash crunches caused by slow international payments with a factor that offers import/export services.
Try: 

CIT, one of the world's largest providers of factoring, manages the entire import/export payment process — from invoicing through collections.

Check references

Factoring companies are less closely regulated than banks and thus require due diligence. Once you've initiated contact with a factor, ask for and check references.
Try: 

For added security, consider going with reputable, big-name firms, such as Wells Fargo, GE Capital or UPS.

Avoiding nonpayment

Factors may insist on a lien against your assets in case of non-payment. They may also negotiate a deal in which you're forced to repay funds for unpaid invoices.
Try: 

Inzap.com, which specializes in invoice funding for small businesses, requires repayment of any advanced funds that aren't paid within an agreed upon term.

Understand fees and payment structures

While most factors charge in the 3 percent range for their services, payment structures differ. Some will pay you almost the full amount of the invoices upfront; others will pay only a percentage of the invoices with the remaining percentage being sent to you once they've received payment of the invoices.
Try: 

Some factors, such as Capital Funding Solutions, advance approximately 60 to 80 percent of the invoices, with the remainder sent upon payment of the invoices.

Review your contract

Pay particular attention to pricing structures, total fees, monthly minimums and contract length.
Try: 

Check out this sample factoring agreement for an idea of what you can expect.

 

• Seek recommendations from your banker, accountant, lawyer and trade association for factors that serve your industry.
• A good factor should not only help you with cash flow and collections, but should treat your customers politely and be interested in helping your company grow. Some will even help you start doing business abroad.
• Look for factors that have experience working with companies in your industry and of your size.
• Shop around. Factoring rates are more competitive than ever.
• Consider your customers' reactions. Will they be irritated by dealing with an outside party? And are you willing to take that chance?
• Negotiate as you grow. As your company becomes more established, you may be able to land a better rate with your factoring company.

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