Council Post: A Guide To Factoring: A Growth Strategy For SMBs (2024)

Loren Shifrin is the CEO forRevolution Capital, one of the country's leading providers of factoring and cash flow financing.

Over the past 30 years, factoring has undergone a significant transformation. In the late 1990s and early 2000s, factoring companies were perceived as “lenders of last resort.” Businesses typically only sold their receivables when denied financing elsewhere. While, as the CEO of a factoring company, I can say that this doesn’t accurately represent factoring, it wasn’t a well-known form of alternative lending at the time and even one that most companies understood.

Today, many business owners and executives have figured out how to harness the value of factoring. Simply defined, factoring gives companies the opportunity to sell their receivables for immediate access to cash flow without the restrictive financial covenants that a traditional lender might impose.

The Benefits Of Factoring

To give you a practical idea of factoring’s benefits, let’s discuss a case study about one of our clients, a temporary staffing agency, which used factoring to grow its annual revenues. Staffing agencies are great candidates for factoring. They have high upfront costs, payables due weekly and receivables that take 60-120 days to rotate. If an average account for the company has 100 employees making $500 each week, that means it has to float $200,000, assuming the client’s payment terms are 30 days.

The growth potential of a staffing agency is very much limited by its access to capital. By selling its receivables to a factor, this business was able to eliminate its cash crunch and start pitching to larger multi-national companies. Having a strong relationship with its factor meant its only limitation to growth was its ability to sell, which turned out to not be a limitation.


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Without having to wait for money, this company was able to pay staff, suppliers and contractors on time, allowing them to negotiate better rates and attract more business. It also reinvested in its people, training, infrastructure, marketing efforts and advertising budgets to reach new markets.

Similar growth has been seen in other industries, including transportation. Trucking companies’ receivables are 30 to 45 days, but they still have to pay for drivers, fuel, insurance, maintenance, plates and equipment on a weekly/monthly basis. Factoring provides them the same opportunities for growth by alleviating the stress associated with covering payables.

Once the gap between receivables and payables is removed, companies are only limited by their ability to sell, and that’s when the real potential can be unlocked.

Is Factoring Right For You?

Despite factoring’s many benefits, it’s not right for everyone. Here is a list of companies in which factoring would not be a fit and why:

• Companies that sell directly to consumers: Most factoring companies are unable, or unwilling, to underwrite the credit of personal debtors.

• Companies that sell on a consignment or guaranteed sales basis: The nature of the receivables generated does not qualify for factoring.

• Industries such as construction or excavation: These types of industries are deemed too risky for factoring because of statutory lien rights and subcontractor claim rights.

• Companies contractually prohibited from factoring: Independent contractors such as those for specific government agencies are unable to consider factoring as an option.

One of the key differentiators between factoring companies and traditional lenders is the extensive service factoring companies provide, including underwriting, billing, collections, account management, reporting, etc. As a result, factoring can be more expensive than a line of credit with a bank. On the other hand, a traditional lender may only issue a line of credit for $300,000 to a company with $400,000 in receivables. A factoring company will offer that same company a facility of $500,000 and increase that limit as the company grows without the need for expensive audits, a lengthy underwriting process, etc.

A final consideration to determine whether factoring is right for you is where your company is at within its growth cycle. Mature companies with extended credit history, strong fiscal policies and proven financial performance will most likely choose low-interest rates from the banks over flexibility and speed of funding from factoring companies. Younger companies, however, or those at the cusp of their growth curve, are typically more inclined to choose access to capital over the cost of capital, which helps them graduate to banks.

Choosing A Factoring Partner

Not all factoring companies are created equal. The best factoring companies are the ones that want to invest in a business because they understand that its growth is fundamentally tied to their own. This way, they are committed to a mutually beneficial partnership.

Here are a few things to consider when comparing factoring companies:

• Is the factoring company a registered member of the International Factoring Association (IFA)? The IFA has a Code of Ethics that governs all of its members. This Code of Ethics helps keep members honest and accountable.

• Does the contract have a term? It probably does, but what does cancellation look like? Is it a straightforward 14-day notice or a convoluted process designed to lock clients in indefinitely?

• What does the factoring company’s online presence look like? Most companies will have some bad reviews, but what’s more important is how they respond to those reviews.

• What does the factoring company promote: a low fee or high service? If you choose a partner based on the lowest fees, don’t expect the highest service. What they pitch is what you get.

Factoring is essentially a partnership between the capital provider and the service provider. A good partnership is one in which both parties’ interests are aligned.

For companies in the growth stage of business, factoring can be a fast and flexible way to access capital. By selling receivables to a factoring company, businesses can unlock tomorrow’s profits today, allowing them to reinvest in the future of their business.

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Council Post: A Guide To Factoring: A Growth Strategy For SMBs (2024)
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