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