There are many types of commercial financing that are available to business owners. The most notable would be a term loan or the line of credit from an institutional bank. Due to current economic conditions, for a variety of reasons, the bank may be unable to provide financing to certain business situations. Luckily, business owners have been able to turn to another alternative for working capital called factoring.
Using invoices as collateral, factoring companies provide commercial financing by making advances on accounts receivable. An invoice is defined as a product and/or service that has been delivered / completed and accepted by a creditworthy customer. A factor can be either a private company who finance invoices, or a bank or public institution that has a factoring division set up to provide this service. What is important to note here is, the financial condition of the borrower is not as critical as the creditworthiness of their customers.
Here are a few examples of good invoice factoring scenarios;
– A business in a growth spurt which has wide fluctuations in revenue balances making lending limits difficult to project.
– In having a tough time keeping up with 941 payroll tax payments to the IRS, extra capital helps to avoid added penalties & interest.
– Service companies working for large creditworthy customers, who the factor knows will pay their bills
– A business that is hiring staff on a new project and needs capital to keep up with payroll
– Corporations looking for working capital without loss of shareholder equity
– A light manufacturing company placing continuous orders with a supplier for new production
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Examples where factoring would not be a fit;
– Start-ups who have a new contract but need up-front money to get it going will not qualify until they actually can produce an invoice
– Situations related to real estate property are usually unavailable for factoring.
– Factors cannot provide up-front capital to open a restaurant.
– Factors do not cash out annual contracts (money today for funds that will be collected over the next year)
– Factoring is not for any type of retail store that sells to everyday public consumers.