Dewell Marketing

In my last post, I introduced the concept of accounts receivable factoring and today I wanted to give you a bit of history and then some more details on how it works.

History records that the concept of factoring goes back at least 4,000 years, so this is not a new, unproved, questionable means of financing. Factors played a big role in the cotton business in the US back in the early days of this country. The cotton farmers needed to get their crop to the mills in England, but couldn’t usually afford to pay for shipping up front. So a factor would step in and arrange shipping, customs clearance in England and delivery to the mill. He would then collect payment from the mill and get those funds back to the farmers.

By “investing” in the process, the factor guaranteed that both parties concerned got what they wanted. This type of financing was also important in the garment industry in the early part of the 20th century when clothing retailers would order collections well in advance of the time they would sell them, but the clothing manufacturers couldn’t pre-finance the inventory. Factors filled the gap.

So how does it work? Pretty simple and from the time you begin the conversation until you have approval can be as little as a week.

Besides speed, here is the BIG advantage of factoring over bank credit. Your company is not being credit checked! Your customers are, because they are the ones who are going to be paying the factor. As long as you, or your business, don’t have things like federal tax liens or blanket bank liens in the way, you’re OK. And even if your bank has a lien on your assets, the factor will usually be able to convince the bank to release the accounts receivables since this will increase your financial strength which is also to the bank’s advantage.

Once the factor and you agree on the terms, you will cut your invoices as you always do, but will include instructions to make payment to a special bank account set up to handle these transactions. Once you cut the invoices, the factor will pay you 75-80% of the face value of the invoices within about 48 hours. Now you have cash to work with and you can do all the things you need to do, plus perhaps do other things like take advantage of supplier discounts on larger orders or take advantage of their quick payment discounts.

This new “funding source” also allows you to pursue new strategies like offering better payment terms to certain customers to encourage them to place larger orders. You may now also be able to go after bigger accounts that demand longer payment terms (60-90 days is not uncommon for big retailers). You now have the flexibility to take your business to another level.

In the next post I’ll talk about what this costs and why it makes sense.