Prior to starting Alternative Funding Options, my ex husband and I owned an aluminium contracting business. We built screen rooms, pool enclosures, sunrooms, etc.(actually he did the building, I managed). Since we were a start-up company, we could not qualify for a bank line of credit. Most of our work was from Developers who were taking 45-60 days to pay us and this was creating cash flow problems. We were ordering inventory daily and needing to meet payroll weekly.
Like most small businesses, we used our own cash, credit cards and equity in our home (back then you had equity) until we ran out. We had some credit terms with our suppliers but not enough to keep up with the demand of the business we were receiving. We were turning away work. That was very difficult for us to do when we could see how much our business could grow if we only had the cash flow.
Our banker told us we should factor our receivables. We really didn’t understand what that was but I decided to research it to see if this could be a solution for us. It was. How it works is that you sell your invoices to the factor (you usually can pick and choose which ones) and they will advance around 80-85% of the face amount to you within 48 hours. They hold back the 15-20% in reserves and once your customer pays the invoice, they calculate their fee and deduct it from the 15-20%. At that time, the difference is sent to you.
Since we were receiving most of our money within 48 hours, we were no longer turning away work because we were able to buy our inventory and keep up with payroll. We also were able to take advantage of supplier discounts since we had the cash to pay upfront which help offset the factor fee. I thought the best benefit in factoring our receivables was that the factoring company followed up on past due invoices which allowed me to spend that time in other revenue generating areas of our business. What surprised me was that our past due customers were paying sooner since there was a 3rd party handling this. By factoring our receivables, we were able to grow our business and within 2 years, we were bankable!
With factoring, you need to do your homework and make sure you are with a company that has been in business for awhile, has a good reputation and gives you a full disclosure of their terms and fees. As I was doing my research, I was surprised as to how many factors didn’t disclose this information and there were many that had non refundable application or due diligent fees, high closing costs, other hidden fees besides the factor fee and had contract terms with volume requirements.
My experience in going through the process of finding a factor is what led me to starting my own company, Alternative Funding Options, Inc. We help companies find the best financing (which includes factoring) and we do not charge a fee. I recently wrote my May blog on “Frequently Asked Questions about Factoring Your Accounts Receivable” that gives you some valuable information when choosing a factor. There are other blogs that I have written also, that might be of benefit to you, regarding other financing options that are available for purchase orders, inventory, asset based lines of credit and equipment leasing.