Working capital. Every business needs it, but at what cost? One path to obtaining affordable working capital is through factoring, a simple and easy concept to understand. Factoring companies provide businesses with working capital by purchasing their client’s outstanding receivables.
Typically, a factoring transaction is an arrangement between three parties (client, factor and vendor) all of which are businesses. The business owner understands his or her profit margins and the expense associated with factoring while the factor evaluates the risk.
In most cases, the increase in cash flow will not only justify the cost, but actually lower operating margins by increasing sales for the business.
Why is factoring so popular now?
It comes down to qualifying for the capital. Banks make decisions based on business financial history, cash flow and collateral. Factoring decisions are largely based on the creditworthiness of the client’s customer. Factors, however, do perform extensive due diligence on the client as well.
Often, potential factoring clients fit into the category of small to midsized businesses that are in a growth mode, but do not qualify for a traditional bank loan. Usually the client has been in business for an insufficient amount of time or does not have enough collateral to secure a loan. In other cases, some factoring clients will qualify for a loan, but find that the amount is not sufficient to meet their cash flow needs.
Firms that can help clients grow to the point where they can raise additional capital fulfill a much-needed void.
Most factoring companies utilize some type of specialized factoring software that allows clients to track the aging of their outstanding invoices, accrued fees, receipts and so forth. Most factoring software applications allow the client to run a myriad of accounting and financial reports to complement their accounting practices. By creating a transparent environment between the client and factor, it allows both parties to be on the same page and be proactive with account debtors.
Invoice factoring relies heavily on credit evaluations of both the client and customer. Once the client has passed the appropriate credit checks, they should also be informed about the creditworthiness of their customers.
Before we begin factoring any of our client’s customers, we always perform a thorough credit analysis. If one of our client’s customers has been declined for our factoring services, our client usually follows our lead and will not do business with them.
Think about that benefit. A strong factoring company will provide you with a full credit analysis from an underwriting team to assist you in making important decisions about potential customers. Partnering with the right factoring company can provide huge added benefits for any business looking to get to the next level.
Remember, it’s not just about the money. ●
Name: Don D’Ambrosio
Title: President and CEO
Company: Oxygen Funding Inc. is an invoice factoring company located in Lake Forest, Calif., that works with clients to improve their cash flow.