Originally published in the Manufacturer.com magazine. Republished with permission
Factoring has been a form of finance that many businesses have shied away from in the past when really not knowing the benefits… this article will present the clear advantages of factoring.
Factoring is defined as a financial service that provides cash-flow acceleration through the purchase of invoices. For example, a leading factoring bank like 1st PMF Bancorp provides this service by advancing funds on a weekly basis against a borrowing base or list of invoices that a business provides on a weekly basis. It’s simple… the lender buys a business’ invoices for cash so the business does not have to wait 30 to 90 days for payment from its customers.
Factoring has been used for 1000s of years and even the Romans had their own form of factoring to help businesses with cash-flow… Solving cash-flow problems is not a new problem.
Top 10 Reasons to be Factoring:
- It’s a simple product. For example, PMF Bancorp can start an account where there is no need for profitability or years of financials… just a bright future along with a 1 page application and a list of receivables.
- Funding is Quick. Funding on a factoring transaction can happen as quickly as 1 to 2 days whereas traditional bank loans take months to close.
- Increased liquidity…factoring is a powerful financial tool and can provide more cash than a traditional bank line many times over. For example, banks provide artificial credit limits on loans based on equity whereas factoring lines of credit can keep increasing regardless of the company’s equity, sales or financial profits.
- Industry friendly: Factoring is well suited for many industries. For example, PMF Bancorp has grown many companies successfully to multi-million dollar companies in the following industries:
Staffing, Furniture, Wholesale/Distribution, Manufacturing, Apparel, IT, and other Service Industries.
- No audits: Many banks for even the smaller loans require expensive audits.
- No long-term history: Unlike traditional banks, factoring does not require years of tax returns and financials.
- No credit limits: Factoring has no credit limits whereas traditional banks always provide maximum amount the client can borrow.
- Personal Credit is not necessary: Principal(s) do not have to have perfect credit whereas traditional banks require this standard.
- Extra collateral guarantees: Factoring does not require second trust deeds on homes or other properties whereas many bank loans require this.
- Credit Insurance. Last, but definitely not least, Factoring is an excellent way for your business to also protect its invoice repayment by using a factors credit insurance service. For example, PMF Bancorp credit insures many of its clients’ invoices which reduce their risk greatly when selling. If their customer invoice does not pay due to bankruptcy or financial stress, then PMF will cover the repayment risk.
Even though there are many myths, the truth is that a lot of very large and sophisticated companies use factoring and will continue to use factoring to grow their companies.
The question is: “Can your company not afford to use factoring?”