Factoring 101

By Joshua Botello

Transcript:

In this video, I’ll show how to keep your business running using Factoring. 

I'm Josh from the University of La Verne Small Business Development Center. Here at the SBDC, we provide small business owners with free one on one consulting and business tip videos just like this one. So if you are new here, consider subscribing to our channel.

Introduction

If you are a business owner who extends terms for your customers to pay later, then you may have run into times where you run low on money to keep the business going. If you need cash quickly to run the business but are still waiting on your customers to pay their invoices, then a factor may be the one to help you out. In this video, I’ll explain what a factor is, how factoring works and the benefits of using a Factor.

What is a Factor?

So what is a factor? A factor is an intermediary lender who provides your business with working capital in order to keep it running. The factor provides a short-term loan based on the receivables you are waiting on for your customers to pay.

For example, say you're a small manufacturer and you give 30 days for an invoice to be paid. But you realize, Uh oh,  an important bill is due in about two weeks. Instead of hoping the customer pays you early this time, you can contact a factor who lends you the money upfront and then collects the receivables from the customer.  

How does Factoring work?

So how does this work exactly? Once contracted with the factor, they will extend you money for the value of your receivables minus a discount and some fees. The discount and fees fund the factor’s business to get more deals just in case they aren't able to collect on your customers. 

So let's illustrate how this works.  You invoice XYZ, inc. for $10,000 to be paid within 30 days but you have a bill to be paid in 15 days. Here comes Joe factor, who will lend you $8,000 to cover those bills. Joe Factor will then collect the 10,000 from the client, send you the remainder minus their fee of 3% or $300 for a total of $1,700. After that the transaction is complete. 

Benefits of a Factor

Why would you work with a factor? The factor benefits your company by giving you immediate access to your capital without having to wait for the customer to pay the invoice. 

The Factor is also less expensive than lines of credit or debt financing with interest fees. For example, factors may only charge 1.5 to 5% of the total invoice depending on the invoice value and net terms length.  

Just as we saw in our example Joe factor, only 3% was charged for the total invoice but you will have to check to get limits and fees for the best fit for your business. 

Factoring isn’t based on how good your credit is, but on how the customer's credit is. 

So if the customer is profitable and can pay the invoice, the factor will collect, so you don’t have to rely as heavily on your business credit as you would with a traditional lender.

Conclusion

So in this video, you learned that a factor is a lender who provides working capital in exchange for your receivables and collects the money on the receivable so you don't have to. You also learned how the process works and what the factor charges for lending you the money you need at a reasonable rate, generally at %3. And Finally, we covered the benefits of factoring including increased cash flow and is generally less expensive than other traditional forms of financing without credit checks. 

Have you ever used a factor for your business? How was your experience? Do you have questions of your own? Let me know in the comments below. 

Did you know we have a small business blog? Our blog covers topics from starting a business to financing and even marketing your business online. Check out our small business blog and subscribe with the link below.

If you found this video helpful give us a like, share, and subscribe to the channel. 

Don't forget to ring that notification bell to get updates on new videos to grow your business.

Thanks for watching and we’ll see you next time. 

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.