Fast Money with Factoring
Businesses that face the two-pronged problem of tight lending at banks and slower paying customers are taking a new look at factoring, one of the oldest forms of business financing.
Factoring is the purchase of a business’s accounts receivable. A factor lends based on the creditworthiness of a business’s customers rather than on traditional lending criteria, such as how long a company has been in business, the company’s working capital or the owner’s personal credit. New, fast- growing businesses often use factoring, particularly those that can’t collect on invoices before they have to pay their employees’ salaries. Companies in the trucking, personnel, security and healthcare industries are typical factoring clients, but Dennis Custage, owner of Liquid Capital in Coral Springs, says that he’s also funding companies that sell to the military and government agencies.
Because rates can be high, factoring has been referred to as “financing of last resort.” Typically a factor gives a business 80% to 85% of its billed invoice amount upfront with the rest held in reserve to be paid when the invoice is paid in full. The interest rate is typically 2½% to 4% for the first 30 days, says Custage, with additional charges for extra days. “If you can go to a bank, definitely go to a bank,” says Custage, who adds that factoring doesn’t cost as much as investor capital. He says, “An equity participation is the most expensive way to finance a company, and you’re giving up control. I would call that the financing of last resort.”