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Small businesses with cash flow problems may have trouble getting a line of credit in this financial environment. One solution may be to factor your accounts receivables.

Factoring is a financial transaction in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Unlike a loan, the financial transaction is a sale of an asset based on the value of the assets (receivables), rather than the firm’s credit-worthiness.
Typically, the factor will pay between 70% and 90% of the value of the receivables and then take over collection efforts.

Factoring has been around a long time, although its reputation has not always been stellar. In this credit climate, it is receiving renewed attention as a legitimate financing vehicle.

Factoring Pros:

• Transactions can be structured quickly &endash; often in as little as 48 hours.
• Your creditworthiness isn’t at issue &emdash; although your customers’ credit history may be.
• The factoring company takes over your collections efforts.
• You won’t have additional debt.
• You won’t have to give up ownership or control of your business.

Factoring Cons:

• There are a number of disreputable factoring companies out there.
• Different factoring companies charge vastly different fees, so pay attention to the percentage of your receivables you will receive, what additional fees will be imposed and how they are imposed.
• When the factor takes over your collections, you may face some damage to important customer relationships.

As with any financial transaction, it is important to find a trustworthy partner. Some banks offer factoring services, but ask your attorney and accountant for recommendations. Investigate the factoring company thoroughly. This is a time where it is important to check with several different vendors before making a decision.

Tags: asset-based financing, factoring, recievables, Small business finance

This entry was posted on Tuesday, June 16th, 2009 at 10:48 am and is filed under business law, economy, finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.