Factoring: Alternative Funding Source for Entrepreneurs

April 25, 2013 | By | Reply More

Cash flow means everything to a growing business. Whether it’s meeting payroll or funding product development, an adequate supply of cash flow is vital for both daily business and sustainable growth. Cash flow, however, also means frustration to the entrepreneur who soon figures out that cash from customers never seems to realize in time to meet payables and other expenses. To the entrepreneur, the most vital part of business, is also the toughest to manage.

factoring

Traditional solutions, other than bootstrapping, for cash flow management come in the forms of debt and equity financing. Banks and SBIC lenders offer businesses a low cost, debt solution to cash flow deficiencies. However, for an early stage business with few assets for collateral and a weak statement of cash flows, this type of financing is usually unobtainable. Equity financing includes venture capitalists and angel investors, who offer the entrepreneur a remunerative solution for cash. This form, if you can find it, however, requires the entrepreneur to give up partial ownership and a share of profits in exchange for the investment.




For entrepreneurs who are unable to secure commercial debt or unwilling to give up shares in their company, there is an alternative solution to managing a business’ cash flow. The alternative is factoring, also known as, accounts receivable financing. With factoring, a business can receive immediate cash for its accounts receivable. Factoring does not create debt, and therefore, has fewer restrictions and covenants than debt financing. In addition, since factoring does not require equity participation, ownership dilution and profit sharing are not issues.

The factoring process is simple. Privately funded financiers, known as factors, purchase accounts receivable from businesses, by advancing the business a percentage of the account’s cash value. Once the factor receives payment on the account, they reimburse themselves for the original amount advanced, take out a fee, and return the rest to the business. For example, if a business factors a client’s invoice for $1000, they might receive an $800 advance from the factor. When the client’s payment is received, the factor retains the original $800, as well as a fee of, let’s say, 3% of the invoice, and returns the remaining $170 to the business.

Factoring allows businesses to gain better control of their receivables. By factoring select invoices, businesses can avoid interruptions in cash flow due to slow paying customers or long remittance periods. With cash flow better managed, entrepreneurs can concentrate on growing their business, rather than worry about finding cash.

 
For more information on factoring, read the following:

 
Recommended Books on Factoring:

 About the Author

Amy Colby is with the Hamilton Group. For more information about how factoring can help businesses manage cash flows, visit http://www.hamiltongroup.net.
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Category: Cash Flow

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