Why Companies Factor
The need for cash is common to every
business. Business managers know that it takes cash to pay
for growth and a lengthy delay between delivery of goods and
collection of the invoice can be crippling. On the other
hand, quick payment can mean even faster growth and higher
profits. Different companies factor for different reasons.
Usually, however, the customer profile is a highly
successful, fast-growing business that needs help. A
growth-oriented company will increase sales and profits, but
not necessarily have immediate cash on hand to pay for the
growth. The company has to carry higher accounts receivable
and inventory to meet the increasing sales. Factoring
rescues these companies by providing them with the liquid
assets, or cash, they need to fuel their growth.
Most business people are trained to go
to banks when they need money. However, banks have strict
criteria when loaning money that make it very difficult for
small, growing companies to secure loans. Banks lend
against assets, not sales. If a business generates $1
million in annual sales, it’s a valuable operation; but if
it only has $50,000 in hard assets, it won’t qualify for
much of a loan. The assets of the company and its
creditworthiness are all checked and rechecked during the
due diligence process. And a business must have a solid
track record to qualify for a loan - something young,
growing companies are not able to provide.
A company with no history, no assets
and no credit couldn’t hope for a bank loan, but as long as
their customers are creditworthy, a factor would love to do
business with them. The factor is not extending credit to
the client company, but actually purchasing their invoices –
invoices which represent cash due from their customers. So
the factor is concerned with the creditworthiness of the
customer (whom the industry refers to as the account debtor)
not the client. The factor’s security in the transaction is
their control over the collection system and their ability
to check credit information about the client’s customers.
“Self Employment And The Factory
Industry” by Laurence J. Pino, Esq.
How Does Factoring Work?
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