By: Jonathan Brindley,CA
Principal
Liquid Capital
As an entrepreneur ensuring you have access to sufficient capital is a constant and ongoing struggle. Banks don’t seem to have any money to lend right now — or at least none they want to — raising equity either privately or in the markets is not a great value proposition for many companies with investors skeptical about, well, everything. Also capital costs are high and dilution and intrusion in management can be excessive.
A major bank recently commissioned a survey of 1,004 companies nationwide with annual revenue of $10 million or less that showed slightly less than a third of those surveyed said their bank provides everything they need when it comes to financing and other business services.
Yet business needs to go on. Companies still need to buy goods, meet payroll, cover seasonal adjustments and even seize market opportunities. So what are they to do?
Many small to mid-size business owners are turning to factoring, an alternative to bank lending that provides businesses with capital when needed on a flexible formula basis that is proportional to sales. The factoring “line” grows as the sales to credit worthy customers increase giving clients an opportunity to capitalize on market opportunities.
Any company or business entity that offers credit to corporate or government accounts can benefit from factoring either all their receivables or just a few select accounts.
Following are some of the most frequently asked questions about factoring showing how business owners can benefit:
Q: What is factoring?
A: Factoring is the purchase of corporate accounts receivable. It’s generally used when a company has market opportunities requiring greater capital resources then they posses to properly exploit the opportunities. Factoring gives that company access to capital through flexible and cost effective means.
Q: How does factoring work?
A: The factor purchases a business’s accounts receivable and gives them a large percentage of the total creditworthy accounts receivable up front and the remainder when they are collected. The factor handles all the credit checks, processing, reporting and collects the accounts receivable so the client is able to concentrate on growing their business.
Q: How does factoring differ from other types of financing?
A: Factoring differs from traditional bank loans because the credit decision is strictly based on receivables rather than other criteria like how long the company has been in business or balance sheet and working capital ratios and personal credit scores which are key considerations for most banks. Factoring differs from equity financing in that factors don’t take equity in the company, do not sit on the board or charge management fees. Since contracts are short term, the client could elect to stop factoring whenever they choose.
Q: Who can benefit the most from factoring?
A: Generally, any business-to-business company with good margins that has the ability to increase their sales but are held back because of a lack of capital can benefit from factoring. The industries that tend to use factors now are diverse and without factoring, they wouldn’t be able to expand.
Q: What are some common misconceptions about factoring?
A: The biggest misconception is that people believe factors are a lender of last resort, but that’s not true, factoring is designed to support growth opportunities. In addition to providing financing, the factor will do credit checking, receivables accounting and reporting, and all the collection work, thus saving the company the salary of employees hired to handle these same tasks and all the ancillary expenses. As well, most employees tasked with these duties are not trained credit or collection professionals, which exposes companies that want to offer payment terms to customers to increased risk. Trained employees are expensive and hard to find . Using a factor dramatically reduces these risks. Most clients are motivated to contact a factor for the money, but they soon realize the services and flexibility are equally as important.
Q: Do you see factoring becoming the norm if these economic conditions continue? For what reasons? A: With banks becoming more stringent and less dependable, businesses can’t get the financing they need. In Europe and the U.S. , factoring is more established and its volume has increased substantially. Given its increasing popularity in other markets, I think it’s only a matter of time before it enjoys a similar level of acceptance in Canada.
Liquid Capital is an established international network of finance professionals with over 65 independent local offices throughout North America, who specialize in providing clients with Accounts Receivable financing. For more information, visit www.liquidcapitaladvancecorp.com
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