example of using account receivable factoring, sometimes called
invoice factoring, to raise capital and increase cash flow in
Manufacturer, of the Manufacturing Widget Company, was in a bind.
He received a request from Customer International for 5,000 widgets
a month if he could promise a start-up quantity of 40,000 widgets
in 90 days.
Manufacturer knew that Manufacturing Widgets could do it - he would
have to add a second shift and buy another machine - but where could
he get the cash by next week to start production? If
he went to the bank, it could take weeks - and Mr. Customer
needed an answer by Friday, accounts
receivable factoring could be the answer!
he remembered reading about factoring in a high-profile business
magazine. The article said that factoring had been around for years,
many people didn’t reap the benefits because they simply
didn’t understand what factoring was or how it could work
for them. Mr. Manufacturer called the good people at Midwest
Factoring Group and asked them how a
factoring company could help
him use his account receivables to raise capital immediately.
Factoring Group explained to him that invoice factoring turns
his outstanding invoices into working capital through account
receivable purchasing. Account receivables purchasing
is commonly referred to as factoring, accounts receivable factoring,
or invoice factoring. Factoring is
not a loan, so he wouldn’t have to worry about the hassles
he would normally get from a bank. Rather, factoring is asset
based (releasing the funds frozen in account receivables) so the
only person he would be borrowing from is himself.
new debt?” Mr. Manufacturer asked.
right. No new debt. Factoring
account receivables is simply getting the money due to you, only
sooner, to help your company grow faster. Midwest
Factoring Group didn’t ask for collateral or a personal
guarantee. Midwest Factoring Group said they would buy Manufacturing’s
Widgets’ account receivables and advance them up to 75% of
the value of their receivables. The factoring company would take
care of the invoicing, collecting, and reporting for the Widget
Company, then pay them the reserve upon
collection. The factor would take a portion of the invoice amount
as payment, as low
as 5 percent to 7 percent, so Mr. Manufacturer would
not have a new bill to pay.
had they ever worked with a Widget company before?” Mr. Manufacturer
wanted to know.
Factoring Group explained that there are many business plans
available in industries as diverse as apparel, accessories, auto
parts manufacturing, computer equipment, electronics, furniture,
hardware, housewares, medical supplies and equipment, software,
contract laborers, staffing agencies and more. They were happy to
supply him with the financing program and factoring services that
were best suited for his needs.
Manufacturer was able to call Customer International and take