When Credit is Tight, 'Factoring' Can Help

There are many types of commercial financing available to business owners. The most notable would be a term loan or line of credit from an institutional bank. But due to current economic conditions, banks may be unable to provide financing to certain businesses. Luckily, business owners are turning to an alternative for working capital called “factoring.”

Factoring companies provide financing by making advances on a business' accounts receivables, using invoices as collateral. An invoice is defined as a product and/or service that has been delivered/completed and accepted by a creditworthy customer. A factor, as these financing companies are called, can be either a private company or a bank or public institution that has a factoring division. What is important to note here is, the financial condition of the borrower is not as critical as the creditworthiness of its customers.

Here are some examples of scenarios where factoring works:

• A business in a growth spurt but whose revenues fluctuate wildly, making lending limits difficult to project.
• A business that is having a tough time keeping up with 941 payroll tax payments to the IRS and could use extra capital to avoid added penalties & interest.
• Service companies working for large creditworthy customers that the factor knows will pay their bills.
• A business that is hiring staff on a new project and needs capital to keep up with payroll.
• Corporations looking for working capital without loss of shareholder equity.
• A light manufacturing company placing continuous orders with a supplier for new production.      

Here are some scenarios where invoice factoring doesn't work:

• Startups that need upfront money to get a new contract going will not qualify until they actually can produce an invoice.
• Situations related to real estate property.
• Restaurants in need of upfront capital to open.
• Companies hoping to cash out annual contracts early (in other words, pocket money today for funds that will be collected over the next year).
• Retail stores that sell to the average consumer.