Here's How Factoring is Better than a Loan or Line of Credit
Written by: Donna Poisl
When business owners realize they have a cash flow problem and
start looking for ways to solve it, the first thing they usually
do is call their banker or the SBA.
The second thing they do is discover all the financial and
credit information they will have to provide and how many weeks
or months it will take to find out if they are approved.
Bankers decide what a business qualifies for by the value of the
assets they own and can use as collateral. Many businesses don't
have many assets, therefore the loan or line of credit they
qualify for is not what they need. Even a business with many
assets often can not borrow as much as they need to keep
everything running smoothly on a continual basis.
Funds available through factoring are actually unlimited, in the
sense that they are based on how much business you do and how
much you can do in the future. The assets you use as collateral
are the accounts receivable you generate for goods or services
you have already delivered. That means the amount you can get
each month depends on the amount of work you delivered the
In order to qualify for a bank loan, you have to be in business
long enough to establish good credit and show financial
statements that will allow the banker to feel that you can repay
the loan out of your company profits.
If you haven't been in business very long, are in Chapter 11 or
have tax liens, you wouldn't be approved for a bank loan but you
would probably qualify for factoring, if your customers are
credit worthy. The most important thing a factor considers is
the financial strength of your customers.
Factors need basic financial information about you and your
company. Once the factors see your A/R aging report and get the
names, addresses and phone numbers of your customers, they do
credit checks and make the decision based on that information.
They will verify that the goods or services that you invoiced
were actually delivered and accepted by your customer.
The factor advances you 70%-90% of the invoice and then waits
for your customer to pay. When the bill is paid, you'll get the
rest of the money except for the small fee (2%-5%) the factor
charges for this service.
Some business owners think that if they pay 2.5% fee to factor
an invoice that they are paying 30% per year on the invoice. But
that isn't the way to figure it. If you are going to multiply
the 2.5% by 12 to get the yearly/annual amount of 30%, you will
also have to multiply the invoice amount by 12. When you do
that, you'll see that you are still paying 2.5%, not 30%.
Example: use a figure of $50,000 a month and 2.5% fee (for
payment in 30 days): 2.5% x $50,000 = $1,250 and $1,250 x 12 =
$15,000. This is the amount of fees you will pay in a year. Now
multiply the invoice amounts: 12 x $50,000 = $600,000 and 2.5% x
$600,000 = $15,000. This proves you are paying 2.5%, not 30% and
there aren't any bank loans available at 2.5% interest.
There are many ways you'll make up the cost of factoring. By
having your money in your own bank account almost as soon as you
send the invoice, you could save more than the amount of the fee
with discounts from your suppliers. When you pay on delivery,
you also make your suppliers happy and get better service from
You'll gain more than that by being able to go after and accept
more jobs. If you know that you will be paid when you send each
invoice, you will feel confident when large orders or new
customers come in and won't have to hesitate, wondering if you
should accept them.
You can keep up with payroll, insurance and taxes when you don't
have to worry about when you will be paid for the jobs you do.
There will be less stress in your life too. Maybe this is the
best part. Maybe it is priceless.
About the author:
Donna Poisl is President of Creative Funding Solutions. CFS
works closely with several of the best factors in the country,
each with different rates, fees and requirements and is able to
find the best one for each client. Contact Donna at
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