By Cassandra Consiglio
Few noticed in late May when the Bank of Canada reported that chartered banks’ lending to Canadian businesses dropped an astounding 19% over the last 12 months — but many small- to mid-sized businesses have noticed when their loans didn’t come through or their lines of credit were substantially decreased. Most businesses have also no doubt noticed that customers are hoarding cash and delaying payments for 60 and 90 days and beyond. The credit crisis on Wall Street is now impacting businesses on Main Street.
Even governments are being affected. For example, the Government of California has slowed or stopped payments, in effect turning their suppliers into unwilling lenders and damaging their cash flow. These days, for most small and medium-sized businesses, the old adage cash is king is paramount. As these cash-flow challenges emerge, responsible business managers need to find alternative sources of financing to keep employees paid and their own suppliers happy. Factoring is an excellent source.
What is factoring? Factoring firms acquire a company’s accounts receivable, providing a business with funding up front. The factor handles the credit checks, then collects and records each receivable for the client. At our company, once we have reviewed our new client business’s financials and customers, we typically pay them up to 80% of their invoice immediately in cash, and then the remainder is paid when the invoice is collected, minus a fee of between 2% and 5%.
Typically, factoring is used when a company is in its infancy, having financial cash-flow challenges or experiencing rapid growth during which quick payments from factors can be used to fund further sales growth; however, in challenging financial times, well-established companies are giving this alternate method of financing a closer look.
When businesses raise concerns about factoring, a couple of key points are worth keeping in mind. First, the International Factoring Association notes that more than US$1.3 trillion dollars’ worth of invoices are factored every year, and even very large companies use factoring when it’s appropriate. Candidates for factoring are not companies that are going out of business; in fact, if a business is in trouble, then it’s more risky for factors to finance it.
However, factoring may not be for everyone, and business owners are often told by their bankers, accountants and business friends when factoring might be helpful. One cost-saving benefit is that the factor professionally manages the account receivable process, freeing up the client’s A/R staff to be assigned to other tasks.
Factoring also differs from traditional bank loans because the credit decision is based on receivables and your company’s current success rather than other criteria — e.g., how long the company has been in business, working capital and personal credit score — that a bank would normally take into consideration. Factoring differs from equity financing in that factors don’t take equity in the company. Since contracts are short-term, a company can elect to stop factoring at any time and owners always retain maximum control over their business’s future.
In short, with the credit crisis directly impacting bank lending and customer payments, businesses and their advisors such as bankers, lawyers, accountants, and management consultants need to be aware of alternate sources of financing. Factoring is one such source. For a free white paper explaining factoring in more detail, email firstname.lastname@example.org.
About the author:
Cassandra Consiglio is president of the Pyx Financial Group (www.pyxfinancial.com) of North Vancouver, BC, a factoring company and a long-established provider of alternative commercial financing to Canadian businesses.