Factoring is the purchase of accounts receivable invoices at a discount. It’s a simple means for a small business to maintain working capital to enable growth.
The client offers invoices to the factor; the factor extends credit to its customers and makes immediate purchase of invoices. With this cash flow the client makes sales and grows at any rate they wish, leaving the factor to wait for the agreed terms to run and in turn be repaid by customers (debtors).
Factoring is a proven niche finance device. It’s worthwhile in certain situations, and abundant and common. It has deep origins, yet in Wisconsin it’s largely unknown.
Small businesses often begin simply. Personal capital, along with “friends and family” investment, may propel the start. These businesses usually don’t get help from “angel” investors and venture capital, which must reserve their investments to seemingly sophisticated, innovative enterprises.
Often an entrepreneur is not entirely revolutionary, but convinced of a better idea and approach and willing to take full risk to earn the possible reward.
Defining the culture of bank lending produces debate. Bank loans are made and bolstered by SBA programs. But many must still be declined, or just may not be sufficient for the small business.
It’s fair to describe factoring as mostly a short-term tool for non-bankable credits. But moreover it’s transactional, as it is not lending or long term. As long as it’s discussed in the “bank lending mindset,” it will be thought expensive. However, when contemplated as an unrestrictive “valve” for rapid growth, (with factored invoices coming “off balance sheet”) by giving a discount per transaction in order to have constant working capital, resulting in the business gaining the most net profit dollars, it is easy to justify.
When a business wants to depart from a factoring relationship, it’s simple. And when it elects to transfer to traditional bank lending, it’s welcome.
