Factoring is not a new concept in modern finance. In fact, some say that this practice has been around for hundreds of years. Today, many companies have taken advantage of factoring as a way to get cash for operational expenses and to spur growth. Factoring is very useful for all business sectors and there’s factoring for flooring companies as well.
One of the more notable cases of factoring for flooring companies happened in the late 1990s. At the time, factoring was growing out of its garment industry roots and factors were beginning to offer their financial services in the health care, IT, and construction industries.
Floor Concepts is a commercial flooring company based in New Jersey. In 1998, the partners in the company needed more funds for their business. They had numerous businesses opportunities, but they did not have the cash to fund new projects.
And they knew perfectly well that banks would not help them. They had tried to get a loan from First Union Bank the previous year, and their loan application was rejected. The partners did not have the collateral the bank needed, as they didn’t own their own building. But without an infusion of cash, Floor Concepts would be unable to hire more workers and they could not buy the supplies needed for new projects.
Factoring to the Rescue
So what Floor Concepts did was approach a factor in New York. The flooring company offered invoices totaling $220,000 to the factor. The factor advanced them 60% of the value immediately, which amounted to $132,000. The factor also took responsibility for collecting the payment from the company’s customers. When the customers finally paid in full, the factor took 3% of the total invoice ($6,600) as fee for its services, which is called the discount. The flooring company then got the remaining $81,400.
The factor was a true help, because it was able to offer financing without requiring collateral. It didn’t matter that Floor Concepts at the time did not have excellent credit. To the factor, what was important was the credit-worthiness of the flooring company’s customers. And those customers were trusted by the factor, because they included Hackensack University Hospital and Barnes & Noble. It seemed clear to the factor that these customers could be trusted to pay the invoices.
The flooring company got their much needed capital and as a result it was able to bid and win many contracts. The profits from the new projects were much greater than the cost of the factoring services.
There are several ways of negotiating the advance rate and the discount, which varies depending on the factor you talk to. You can promise them more factoring deals in the future, as well as give them invoices from customers who always pay in full promptly, and the advance money may go up while the discount goes down. Overcome potential problems, and factoring for flooring companies can work for you.