ShareThisBy STEPHEN WINDHAUS
Monday, November 13, 2006
The world of a small business advisor columnist is not simply sitting down to convey messages and watching it flow through the media world. It requires homework, research and yes, battling the litany of phone calls and e-mails from representatives of companies that want you to refer to them and their products in your column. Honestly, I'm not the type of person to make these types of references unless having personally experienced the product or service, and with positive results. Today is the exception.
FACTORING
During my many years in the small biz advocacy world I was always seeking ways to help my clients secure financing. Factoring was one of the alternatives to traditional financing that I introduced to them. Briefly, factoring is the process whereby the company invoices the customer. First you send a copy to the factoring company. The 'factor' then advances you 80 percent to 90 percent of the invoice amount. Once the invoiced amount is collected you forward that to the factor plus a fee for the financing service.
However, it isn't all that simple. Some qualifiers exist:
_The invoice must be collected within a certain period of time, usually up to 90 days.
_Yours should be an existing company with a track record, though start-ups can qualify for the service.
_The sooner you receive payment on the invoice, the lower the factoring fee.
_The invoiced customer must be a demonstrated as a reliable payer.
Companies qualifying for factoring services come from many sectors, including the construction industry.
REVERSE FACTORING:
I thought I knew all the basics about factoring until I received a phone call from Myriam Scherr of American Capital Advance (www.americancapitaladvance.com), touting the advantages of reverse factoring. In short, the company offers its cash advance services under the following qualifiers:
_Your company collects sales via Visa and Master Card transactions.
_You need to provide these credit card transaction histories for the last four months.
_The factor assumes the credit card transaction process, in addition to collecting a fee for the cash advance service.
_The cash advance and collection service typically is carried out over a period of 7 to 12 months.
I did learn that American Capital Advance does not consider startups, and home-based businesses must provide statement of the last 12 months of credit card sales to be considered for the cash advance. On the other hand, as opposed to factoring, your customer's ability to pay is not addressed, because all transactions are conducted via Visa or Master Card credit processing.
TO FACTOR OR NOT TO FACTOR
I am certain, if you do your homework, it is apparent the interest expense on a competitive small business loan may be less expensive than factoring and reverse factoring. On the other hand, many small businesses have difficulty qualifying for a commercial loan. Likewise, many do not want to mortgage their homes to finance the business. Factoring and reverse factoring do offer a very legitimate alternative.
