Factoring the
sale of invoices is one of the oldest forms of “lending”, dating back until at
least the time of the Romans. It’s also one of the simplest and straight
forward ways of converting assets to cash, yet it is often misunderstood.
Terms
like “hold back,” “reserves,” “advance rate,” and “points” can put people on
edge. Add to the fact that just about everyone tries to compare “factoring vs.
bank loans” and it is no wonder many people leave the table confused. We all like
to begin discussions about financing with terms, but discussing factoring costs
in the same way we discuss loan terms is not the best way to help a customer
understand factoring.
Because
the invoices are the source of repayment to the factor, they are evaluated more
carefully that the client’s financials. Many companies that would not be able
to obtain a loan can factor to raise cash, and do so quickly! Factoring could
also be used in a “work-out” situation for an existing customer.
Why
over-complicate the issue? If as banker we are asked to help a customer get
cash, let examine the possibilities and let the customer decide what will work
for them. Sale
of invoices, which is all that factoring is, might be just the solution. It is
routine in some industries: transportation, temp agencies, construction
contracting, and others where there is a typical long lead time between
incurring expense and receiving payment.
Other
variables come in to play – especially when it comes to due diligence, but the
factor will handle that. CBAO has identified numerous sources for factoring,
some of which specialize in certain industries. If you have a customer who
might benefit, let’s begin a discussion!
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