• Do business owners turn to factoring when they have experienced a downturn?

• Is factoring a good option for companies who have been turned down for a more ‘traditional’ line of credit?

The answer to both of these questions is, yes.  So, while using factoring to help a business owner take control of their cash flow and firm up their balance sheet to get them through a rough patch; it can also be said with a good measure of veracity that factoring can also assist a strong business grow and keep up with increased demand.

Many business owners turn to accounts receivable factoring because their cash flow is inconsistent.  A business may have a relatively small cash flow for part of the year, and when they are in their peak business cycle, their cash flow increases significantly.

By factoring their invoices business managers and owners control this cash flow cycle.  They find that rather than being reactive to the ebb and flow of their cash flow, they can make their receivables work for them.  It becomes a much easier and less stressful event to say ‘yes’ to new customers or larger orders once business owners are confident they are not going to be strangled by tight cash flow.

Used correctly, factoring is a very effective tool for a variety of situations.

Okay, so what does that mean to you?

I always tell business owners who are new to factoring; our clients all have two things in common: • They all provide a product or service to another business. • Our clients all have a majority of their customers on payment terms.  Meaning, our clients have to wait to be paid for whatever product or service they have provided to their customer. From this common intersection extend many avenues as no businesses are exactly the same.  All have various business challenges, invoicing processes, and diverse customers.

To further explain the definition at the beginning of this blog in real world terms, this is how a typical factoring transaction works:

Example:

• ABC Distribution has an invoice for $1,000.00 from their customer; Widgets R Us. • ABC Dist submits the $1,000.00 invoice to Crestmark to be factored. • Crestmark enters the invoice into our accounting software, and advances 80% of the $1,000.00.

• ABC Dist gets $800.00 wired to their bank.  The advanced amount is available to our clients the next morning. • Crestmark keeps the 20% (or $200.00 in our example) in a reserve account for ABC.

• 30 days later Widgets R US pays the $1,000.00.  Payment is made payable to ABC and sent to our lockbox.  We post the payment and assess a fee for factoring the invoice. • In a few days time (as long as it takes for Widget’s payment to clear our bank) we release the remaining reserves to our client.

The bottom line result of the above example is;

ABC has the use of $800.00 of the original invoice amount within 24 hours of presentment instead of waiting the 30 days for Widgets to pay.  Assuming a 2% fee (insert disclaimer, actual fees vary) for the first 30 day period; the above scenario will net $980.00 of the original $1,000.00 invoice to ABC Dist.