Mid-size businesses should factor in factoring

| December 14, 2010

In today’s credit restricted economy, it’s more important than ever for medium-sized businesses to know what forms of financing are available to them.

Medium-sized businesses are different, but like companies of all sizes they have the challenge of chasing up slow payers. 

In fact, because they are more likely to be providing services to large companies, the mid-size business is feeling this pain more acutely.    

The global financial crisis and the rise in funding costs has prompted banks to protect their internal balance sheets more than ever, and are tightening up their credit criteria for businesses of all sizes. To ensure their success, mid-size growth companies may need to rely on alternative forms of financing, like accounts receivable factoring.

Accounts receivable factoring, also known as invoice factoring, is a form of commercial financing or debt financing which allows a company to use its Accounts Receivable as collateral for borrowing money. Basically, a factoring company makes arrangements to finance a company’s invoices, in exchange for immediate payment to ensure the business has the necessary working capital to operate effectively.

As we head into the holiday season – which is notorious for slow payments as the Accounts Payable teams seem to disappear until mid January – it makes sense for the Financial executives of mid-size companies to review how invoice factoring may benefit their businesses on either a ‘spot’ basis over the summer period or as part of a cash flow management strategy for 2011.

There are eight primary reasons for a business to consider invoice factoring as part of their 2011 business operations:

1. Speed

Unlike most finance facilities, the factoring relationship can be set up within days, and once established, the funding of the invoice can happen between 24 to 48 hours. By receiving cash soon after the invoice is raised, the business will find that its cash flow improves.

2. Financial

While many medium-sized businesses have a good credit history, some may not.  Most of the funding decision with factoring is based on the credit of the customer.

3. Credit limit

As long as the client is invoicing credit-worthy customers, factoring relationships can grow in line with the client’s increase in Receivables.

4. Discipline

Lack of discipline often causes companies to not pay loans regularly down the line. With factoring, there’s no lack of discipline – each time a customer pays the invoice, it retires the mini-loan.

5. Equity

Factoring is considered an off-balance sheet form of financing, which keeps any net term liability off the corporate balance sheet, preserving the equity position in a positive manner.

6. Set up

The set up process requires minimal paperwork and no lengthy negotiations compared to banks and equity venture funding.

7. Cost

The cost of factoring invoices is relative to the short-term nature of the transaction, not lasting more than 90 days – more than a bank, but less than a Venture Capitalist.  Note that companies with thin profit margins are not good candidates for factoring to grow their business.

8.  Growth

Having access to capital improves the financial position of a growing company. While factoring is a short-term solution, it ultimately leads them back to conventional bank financing.

Remember, the successful mid-size business is the one who finds that all-important cash stream, without going into debt. Invoice factoring offers an alternative to the traditional bank loan, allowing executives to concentrate on growing their business, instead of paying for it.

David Hechter is the Director and COO of The Interface Financial Group Australia, which provides short-term financial resources including invoice factoring. IFG launched the Australia operation in 2006 following the success of its New Zealand businesses which commenced in 2004. IFG’s innovative service includes spot factoring – the purchase of a single invoice or number of invoices on a use-it-as-you-need-it basis.