Factoring Your Receivables

Another source of money for business is factoring. That is if you have current sales, and have to wait for your receivables to come in. Many small businesses do this; however, it cuts deeply into your profit margin.

Essentially you are giving title to your Receivables to a third party in exchange for a discounted rate on the total sale plus a deposit on each transaction leaving you with anywhere from 70-90% of the total sale. Usually, the third party has recourse to charge back the amount paid to you if the customer fails to pay their bill.

If the customer doesn’t pay their bill, you have to give back the money advanced to you in the entire amount. This puts you out even more than the original amount of the bill. Remember, you paid the factoring company a discount to use their money.

Factoring companies are still concerned about your credit worthiness, but are willing to extend money more liberally than other sources because they have title to the debt from other businesses and are likely to collect their exposed amount.

Ultimately, I am not a fan of factoring as it cuts too far into the profit margins of a company, and most companies who make a good profit are not in need of services like this. Think of factoring as the business equivalent of payday loans. Once you get in, your profit margins go down, if you have profit margins.

The alternative is either Raising capital through equity sales to cover your Cash-flow needs which is the best way to protect profit margin, or to get a business loan through a bank or other sources.

Make sure you spend time with your CPA discussing factoring before entering into any agreement. It could be what puts you out of business, when you think it will be the solution to saving your business.