Receivables Factoring
Summary
In times of growth, businesses can typically use more cash on hand. Additionally, a temporary setback in business or seasonality may be another reason to raise capital using receivables factoring to temporarily fill the operational gap.
Receivables factoring is an easy way to raise this capital. Why? Because this multi-billion dollar industry has is an acceptable form of financing for both suppliers and purchasers and has been in existence for decades.
The business that plans to raise money using receivables factoring (also just called factoring) will sell some or all of its its accounts receivables and in return get cash.
The factoring company will then collect the payments for the company, interfacing directly with the customers, and when the bill is paid, the factoring company will send the balance to the company, less the factoring fee.
Setting up a receivables factoring deal is typically very fast, and this speed may be needed when a company must satisfy orders quickly.
Alternatives to factoring include bank loans and other forms of financing, some of which typically take longer and may have significantly higher or lower costs of financing.
There is typically an up front cost to arrange factoring, typically in the 1-3% range, and then another fee that scales up depending on how long the bills are outstanding, typically 1-3% per month. These rates depend on the diversity of customers, the track record with those customers, the business's age, the consistency of revenue growth of the business, creditworthiness of both customers and the business, among other factors.
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