| The process typically works like this: Your | | | | financing that is based on the projected |
| company delivers a product or service and | | | | future credit card sales revenue generated in |
| issues an invoice to your customer. If you | | | | the company. |
| offer terms to your customers, without | | | | |
| factoring, you would wait 30, 60, or 90+ days | | | | Millions of times a day every business that |
| for payment. | | | | offers customers charge privileges using |
| | | | credit cards is the direct beneficiary of |
| With factoring, the factor immediately | | | | factoring. American retail business depends |
| purchases the invoice and advances an initial | | | | on the factoring system, and without it the |
| payment of 70-95 percent of the invoiced | | | | national economy would be seriously |
| amount. In most cases, the business owner | | | | handicapped. |
| will have funds advanced within 24 hours. | | | | |
| | | | In this familiar transaction, the issuing |
| When your customer pays the invoice (payment | | | | bank or card company is the factor-using the |
| is made directly to the factor), you'll | | | | Visa, MasterCard or other system-advancing |
| receive the remaining balance (5 to 30 | | | | the seller of merchandise or service cash |
| percent of the invoice amount) less the | | | | immediately after your purchase, long before |
| factor's fee. | | | | you actually pay. Because the seller gets |
| | | | cash up front without having to wait for your |
| Factoring is a well-established form of | | | | payment, his money is not tied up in |
| business financing that produces immediate | | | | receivables. |
| cash payments to a company at the time of | | | | |
| shipment, delivery and invoicing a customer. | | | | For the double privilege of making credit |
| | | | available to customers and getting immediate |
| In its basic form, factoring has been used by | | | | payment, the business is willing to pay a |
| American business since Colonial times, and | | | | discount to the issuing bank or credit card |
| its origins go back even further, literally | | | | company-typically two to four percent of the |
| thousands of years to the early days of | | | | purchase price. Thus for ever $100 of |
| commerce. | | | | merchandise you buy with a credit card, the |
| | | | seller gets $96 or $98 in immediate cash. |
| Perhaps the most attractive aspect of | | | | |
| contemporary factoring is a continuous level | | | | Factoring accomplishes the same for |
| of cash flow into the bank account of the | | | | commercial-or business to |
| business, allowing for business planning and | | | | business-transactions. When you extend credit |
| operation in a timely and efficient manner. | | | | to a customer, you are essentially becoming |
| | | | that customer's part-time banker. For the |
| The factoring system also means available | | | | period credit is extended to Customer |
| financing which automatically adjusts to | | | | Smith-30 or 60 days-you become his lender, |
| sales departments sales activity and the | | | | and he your borrower. |
| company's unique rate of business growth, | | | | |
| because increased cash is triggered by new | | | | For the length of time credit is extended you |
| invoices. Factoring is the only finance | | | | lose the value of that tied-up money because |
| mechanism directly linked to a company's | | | | you can only anticipate payment. If Mr. Smith |
| sales results. The greater the sales | | | | had paid cash, you could have invested that |
| revenue, the larger the amount of invoices | | | | money immediately, earning interest on it |
| that can be factored. | | | | rather than having to wait. When Smith pays |
| | | | late, your cost increases still further. |
| The greater the sales activity (invoices), | | | | |
| the larger the advance on those invoices. As | | | | Since there is no "free lunch" in business, |
| such, companies that are in a growth mode | | | | someone has to pay the costs of your |
| will benefit greatly from invoice factoring | | | | extension of credit; either you pay by |
| as it allows the company to unlock revenues | | | | reduced profits, or your other customers are |
| that are tied up in receivables. | | | | forced to pay higher prices. In a marginal |
| | | | company, excessive credit extension and late |
| Factoring is used more than all other types | | | | customer receivables can spell disaster. |
| of business financing combined. Many of | | | | |
| America's major companies are enthusiastic | | | | Invoice factoring is off-balance-sheet |
| users of this finance system and have been | | | | financing so it does not add burden to the |
| for years. | | | | financials of the company. The decision to |
| | | | factor is not based on the personal credit of |
| But factoring is not an exclusive prerogative | | | | the owners of the business. Instead, the |
| of commercial and industrial giants. In fact, | | | | factoring decision is based on the credit |
| factoring comes a lot closer to you | | | | worthiness of that businesses client base. |
| personally than just through big-name | | | | This is particularly important to start-up |
| business whose products you know and use. | | | | companies that have been in business less |
| | | | than two years... and considered nonbankable |
| American consumers take part in a common form | | | | by most banking instituions. |
| of factoring every time they use a credit | | | | |
| card. There are 1.15 billion credit cards in | | | | Small to medium size business owners who are |
| circulation, 10 each for every American | | | | experiencing cashflow problems would do well |
| cardholder. In 1970 the average balance on | | | | to consider invoice factoring as a means to |
| individual cards was $649, increasing in 1986 | | | | accelerate cashflow and unlock cash that is |
| to $1,472, and today it is over $4,800. Yes, | | | | tied up in receivables. |
| there is a form of credit card receivables | | | | |