Common questions about factoring

Factoring is the selling of invoices, or accounts receivable, to a factoring company for immediate cash. The factoring company acts as an outsourced credit department, handling the collection and processing of payment on the invoices. This helps small businesses because they don't have to spend time managing payments, making collection calls, and figuring out which invoices have been paid and which are still outstanding.

• Factoring involves three parties (you, your customer, and the factoring company) — not two, as in banking.
• Factoring typically provides more cash per invoice.
• Factoring typically generates cash within a day of invoicing.
• Factoring does not require covenants, unlike bank loans.
• Factoring provides additional services such as credit management and collection assistance.
• Factoring is based on the creditworthiness of your customers — not your business's credit history.
• The capital available can grow as sales grow; it isn't limited by your business's equity.

Cash flow is the lifeblood of all businesses — many stumble due to cash flow issues, not because they're unprofitable. Factoring improves and accelerates cash flow by turning the receivables sitting on your books into cash. Short-term business loans do the opposite: they siphon cash out of a business through daily withdrawals from your bank account, often causing more harm than good.

For a wide variety of reasons. Fast-growing companies find their free cash tied up in inventory and receivables. Startups with limited credit history can't get bank financing, which typically requires one to two years of operating history. Seasonal businesses see sales fluctuate too much for banks that want consistent earnings. Businesses in out-of-favor industries struggle to find working capital no matter their performance.

And it's common for a business that's hit a bump in the road — losses, negative equity, the death of a partner, or missed payroll tax payments — to use factoring while they get back on track. Because factoring companies look at the creditworthiness of your customers, they can provide working capital quickly when banks can't.

The main one: your working capital grows as your sales grow — a funding source limited only by your sales, not your equity. Factoring is also used to:

• Obtain better supplier terms by paying cash or within a discount period
• Purchase inventory or capital equipment
• Meet payroll and other overhead
• Meet tax requirements

Businesses that factor need business-to-business sales, typically offering payment terms between 30 and 90 days, selling on a "final sale" basis (not guaranteed, consignment, or contingent sales). Industries that factor most often include:

• Temporary Staffing Companies
• Transportation / Trucking Companies
• Manufacturing Companies
• Commercial Janitorial Companies
• Security Guard Companies
• Commercial Construction Contractors
• Commercial Landscaping Companies
• Distribution Companies
• Oil and Gas Service Companies