Article by Roger Schlueter, MBA
This method of financing is a little more expensive and is usually not a businesses first choice. Factoring Accounts Receivable has been around forever. This method of financing is probably easier than many of the other forms but may cost you dearly.
The Factoring Company pays you an amount of money for your Accounts Receivable and they collect that receivable. They buy $100,000 of account receivable from you for $80,000 cash. You have just reduced your accounts receivable by $20,000. This means that you paid a one time payment of 20% to get your money faster than the normal 30 to 60 days that it usually takes you customers to pay you. This payment was given as an example and could be more or less depending on the Receivable that they are buying. They will tell you that the Amount you paid to receive the Receivable early is deductable as a business expense and they are right but so is interest.
The Receivable is analyzed as to it’s collectability. The more substantial the company the more likely that it will be paid on a timely manner. The number of days the Receivable is past the day of sale is also a determining factor in the analysis. The older the Receivable, the more undesirable the Receivable becomes.
An example of a substantial company is IBM or Microsoft. The desirable age of the receivable is 30 to 90 days. Receivables older than 90 days become stale and the purchaser may think any receivable over 90 days is uncollectable unless the agreement with this customer states a longer than 90 day period before payment is due.
There are many derivatives of this type of financing and it may fit many businesses. This has been a very brief description of the method. The bottom line is that you usually will pay a higher price to finance using Factor Financing. There are many ways to borrow and a company should look at all avenues. Sometimes all avenues will be closed and you may only have one option but remember that all banks use different criteria to analyze a company and just because you were turned down by one bank you may be surprised that another bank may approve your loan request using the same information.
Please Email me if you have any questions at roger@rogerschlueter.com or see my simple website at www.schlueterfinancial.com