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What is Factoring?
Venture
Factoring
"A Bridge to Venture Capital"
Question: What do these
companies have in common: A Fortune 500 software manufacturer,
a venture-backed telco, and a boot-strapped
start-up?
Answer: |
|
THEY HAVE ALL
ACCESSED VITAL FUNDING THROUGH RECEIVABLES FINANCING.
Clearly, companies that are this diverse approach funding for
different reasons and in different ways. But firms of every
size and description have found that receivables
financing—commonly termed “factoring”--can prove vital in
achieving individual business goals.
Factoring is
essentially the sale or financing of invoices. Most invoices
have extended terms --30, 45 or 60 days. A company can either
wait for its customer to pay, offer a discount to get the
customer to pay early, or finance the invoice. Each option has
a cost. By waiting for the customer to pay, particularly if
cash is tight, there is an opportunity cost; a company loses
the use of these funds during that period. By offering a
discount—perhaps two percent for payment in 10 days--you run
the risk of having the customer take the discount, while still
waiting 30 to 60 days to pay the invoice. By financing the
invoice, there is also a cost--a factoring fee--but you are in
control. You can decide what invoices to finance, and when.
You are not reliant upon your customer’s payment in order to
meet your own obligations, or better yet, take advantage of
sudden opportunities in the marketplace. This may prove vital
for a company contemplating R&D and marketing efforts in
advance of a new product launch.
Mechanics of
Factoring:
First, the factor (lender) determines if
your business fits its profile. The factor then analyzes your
receivables, checking the credit of your customers and the
validity of the invoice. Once verified, the factor advances 70
percent to 80 percent of the face amount of the invoice. When
your customer pays, which is usually to the factor’s lock-box,
a factoring fee is deducted from the payment. The fee usually
ranges from one percent to four percent of the invoice amount,
depending on when the customer pays. If the invoice is
disputed by your customer, the invoice must be replaced or
repaid. | |
