By factoring its receivables, a business can significantly accelerate the cash collection cycle. This is particularly useful to businesses that have a mismatch between short term expenses and slow paying customers or customers with generous payment terms.
A factoring transaction is when a business sells its receivables to a third party (the factor) at a discount (typically ranging from 10% to 30%) for immediate payment. When the factor is paid by the customer, the factor will remit the discounted amount back to the business minus a factoring fee.
Consider the example of a business that sells $100k of bicycles once a month to a retailer with 60-day terms. When each shipment is received by the retailer, a factor would buy the receivable and immediately pay the business $90k. When the retailer ultimately pays the invoice in 60-days, the factor will remit the remaining $10k minus, their factoring fee.
Benefits of factoring:
Provides a business with immediate cash
Allows a business to offer payment terms to customers
Helps manage the credit risk of customers
Fast and easy to implement as the underwriting focus is on the receivables not the business
Factoring line can increase as the dollar amount of receivables increases
Sale of receivables to a factor isn’t consider a loan / debt
Typically, not recourse to the business
Common industries where factoring can be helpful:
Staffing – especially medical and IT
Manufacturing
Distribution
Trucking
Other B2B businesses
Morewood Funding helps businesses and commercial real estate investors/owners access capital. If you would like to further discuss how factoring or other loan types might benefit your business, please call or email:
Howard Abrahams
President, Morewood Funding, LLC
917 561 7074
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