Factors finance $120 billion in receivables, yet most small and start-up businesses are not aware of them. Business schools rarely acknowledge them. However, they can alleviate your cash flow problems. They can loan you or advance you money against your receivables and in some cases against your inventory. In other words, your receivables are an asset that the lender (Factor) purchases.
The Advantages of Using Factors:
- You get payment for your invoices within days. This allows you to pay your suppliers on time, to build trust with them, and to take advantage of their cash discounts. It is a financial tool that speeds your business’ cash flow. Factors do not lend money on purchase orders.
- All your costs are variable.
- Factors check the credit of all your customers and would-be ones. Thus, you get more accurate and current information than if you performed this function on your own. More money is saved by eliminating the need to hire a credit checker.
- Factors collect all your receivables. In today’s world, the majority of customers like to stall the payment of their bills. Some will not pay until someone calls them for payment. The Factors have more leverage than you as an individual have. They may represent 50 suppliers of one customer.
- Factors act as insurers of the receivable. If after you ship a customer and the customer goes bankrupt, the Factor may be stuck, depending on your contract, not you. This feature can help you sleep better as well as eliminate your bad debts.
- The Factor can take over some of your administrative functions and save you the resultant labor costs. On one of our game companies that was created around a licensed product, the Factor supplied us with data on monthly shipments which acted as our Royalty statement. They also provided us with total shipments by territory or account which we used as our Sales Rep commission statements.
- You can get money even though you don’t have a good credit rating. The Factor is only interested in your customers’ credit ratings.
The disadvantages of using Factors are the costs, which can be high in some cases, and they may alienate some of your customers with their collection techniques. You need to read and understand their contract carefully.
You can locate an appropriate factor by going to the website of the International Factoring Association or ask your local banker, SCORE, or SBDC office.
(This post is excerpted from Chapter 11 of Bootstrapping 101.)