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Factoring on receivables

Funny_Girl
Member

Factoring on receivables

What is the overall feeling of using factoring? With credit drying up for lines of credits, is this a recommended move or is this just a 'Pay Day Loan' in disguise?
Message 1 of 5
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2wheel
Frequent Contributor

Re: Factoring on receivables

As credit started drying up the first thing I did was cut some expences out balance sheets. Saved the money and worked on getting payed a little faster. One of my biggest accounts started giving me net 15 I gave them 1 percent discount. It really went a long way with them Instead of carrying a 15k monthly outstand balance I now carry 6-7k balance with them. the first run of checks on the new program I received over 10k In 1 check Took 40 percent of it and payed off all my lines of credit. Which now will free up more cash flow and less use of credit. Which has intrest. Where cash is making intrest in bank
2wheel
Message 2 of 5
Funny_Girl
Member

Re: Factoring on receivables

Which brings me back to my factoring question -

 

I can factor for 1-2% and receive cash immediately. The problem with depending on giving the client a discount is that they can opt to not take it if it benefits their cash flow to wait 30 days so you cannot always depend on a quick turn around on invoices.

 

We have already cut expenses...amazing how little things add up. Our receivables though have gone from an average of 33 days to 45 because of the slowing economy.

 

Does anyone have any opinions on factoring?

Message 3 of 5
GregB
Valued Contributor

Re: Factoring on receivables

This is going to vary alot with different types of businesses. I know some businesses that consider factoring a neccessary evil. They have large costs up front and sell all items on net terms. They can't get enough financing up front. I would think the lenders would be very aware of the high default rates right now and you might find the rates on factoring to be prohibitive. 1-2% sounds optimistic, Do you have a firm commitment at that rate?

 

I have two businesses in completely different industries. If either one of those had to resort to factoring, I would think that meant that I was going out of business in the future. Just be careful if you start down that "slippery slope".

 

Offering 1-2% 10 days, Net 30 days sound like a much more normal business practice. You are motivating the customer to pay sooner but it is true that you can't rely on it. I think your receivables going from 33 to 45 days sound very reasonable in today's economy.

Message Edited by GregB on 05-27-2009 01:15 PM
Message 4 of 5
txjohn
Senior Contributor

Re: Factoring on receivables


@Funny_Girl wrote:

Which brings me back to my factoring question -

 

I can factor for 1-2% and receive cash immediately. The problem with depending on giving the client a discount is that they can opt to not take it if it benefits their cash flow to wait 30 days so you cannot always depend on a quick turn around on invoices.

 

We have already cut expenses...amazing how little things add up. Our receivables though have gone from an average of 33 days to 45 because of the slowing economy.

 

Does anyone have any opinions on factoring?


 

It really depends on what your margins are, who your customers are, etc.

 

Many businesses use factoring as an effective tool to maintain cashflow and count the factoring discount just like a merchant discount on credit cards.  Are you sure about the 1-2%?  That would usually be considered a very low rate, and most likely for 30 days.  If you are pushing 45, you are probably in the next rate as factoring is priced based upon term (30, 45, 60, 90, etc).

 

You might also consider discussing a cash flow managment account with your bank.  This is, of course, an open line of revolving credit that operates in conjuction with your operating account.  It allows you to dip into the credit, like factoring, to cover cash flow cycles.  This can include payrolls, vendors, etc.

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