Should You Factor Your Receivables?

Factoring is one of the more convenient ways to get additional funding to help a business get through difficult time or to take advantage of market opportunities. This financing option is not a loan. Essentially, factoring involves selling your accounts receivable so you don’t have to wait for the receivables to mature (usually 30 to 60 days) before you can get your money. Instead, when you factor receivables you can get as much as 80% of the value of the receivables in a day or two. The rest of the funds will be given to you when the customer pays in full.

So if you need money, is factoring a sensible option for you? Here are some of the indicators:

  • You have bad credit or you don’t have collateral. A stellar credit and collateral are what your bank will require from you if you ask them for a loan. But if you don’t have good credit and you have nothing to offer as collateral, you’re out of luck. In contrast, factors only care about the credit of your customers, and the receivables will serve as collateral.
  • You need the money ASAP. You should just factor receivables instead of applying for a bank loan, because bank loans just take too much time. Banks are meticulous with paperwork because they want to be assured that you can pay off the loan plus interest, on time.

On the other hand, factors don’t really like delays. It may take a week or so to investigate the credit worthiness of your customers, but once you have a factoring line set up and your invoices are factored regularly, you can get the money you need in a day or two instead of waiting 30 or 60 days.

  • Your accounts receivable collections are on a different schedule compared to your expenses. Factoring gets you your money right away, which can be a great help when you need to pay your employees on a weekly basis.
  • You only have few receivables involving large amounts instead of numerous invoices with small amounts. Usually, there is a fee for each account receivable factored by the financing company. So it’s better to consider factoring if you have a single invoice worth $100,000 rather than a hundred invoices worth a thousand dollars each. In the latter scenario, that involves a hundred fees in total.

So if you’re a retailer, factoring may not be for you. If you’re selling medical devices, for example, it may be better if you’re selling a large volume to hospitals than if you’re selling small ticket items to dozens of small clinics in the area.

  • You want to take advantage of the extra services offered by factors. Factors investigate your customers and identify which ones are creditworthy and which ones are not, so you will know which among your customers should be given term payment options. Also, factors take care of the collection, which means you won’t have to set up a separate department for it.

If all these things apply to your business, then you’re an ideal candidate to factor receivables instead of getting a bank loan.