Even though factoring has been around since the early days of civilization, there are many common misperceptions about factoring as a financial instrument.
Some see factoring as a form of last-resort financing for companies that are desperate to make ends meet. Others warn that factoring providers, or “factors,” often lock their clients into multi-year contracts with unfavorable terms. The fact is that factoring works as a vital funding model for almost any company, regardless of that company’s size, industry or financial background.
Despite being a centuries-old way of doing business, the appeal of factoring remains strong. Factoring is still the quickest, easiest way for companies to get paid faster. What follows are stories about two very different kinds of companies that found success using factoring as a long-term funding solution. The owners’ names and other details about the companies have been changed, but their experiences illustrate how versatile and effective factoring can be as a financial tool.
The Start-Up Trucking Fleet
Brett was a dispatcher for an Ohio trucking company. In 2006, he decided to start his own less-than-truckload business. Brett’s background included a poor credit rating and a personal bankruptcy due to financial mistakes he made in his early 20s. Because of that history, Brett knew it would be difficult to secure a traditional bank loan.
Instead, Brett started his company with his personal savings, two trucks, two employees and a Rolodex of potential shipping customers. After a year in business, Brett’s small fleet was breaking even financially. The company served a small but growing number of LTL customers. Brett’s challenge, however, was finding a way to keep up with customer demand. His company did not have the cash on hand to add the new drivers and equipment necessary to handle the growing number of customer loads.
Brett knew it was time for his company to start factoring. He contacted a factoring company he remembered from his days as a dispatcher. Brett’s credit history and his company’s balance sheet were not issues. Unlike a bank loan, factoring relies more on the creditworthiness of a client’s customers, not the client itself.
Within five business days, the factor began purchasing Brett’s invoices, advancing 90% on each invoice within 24 hours. The factor also managed collections and other back-office services for Brett’s company, allowing him to focus more time on generating new business. Once the factor received payment from one of Brett’s customers, it sent him the balance of the invoice amount, minus a collection fee.
Factoring had a tremendous impact on Brett’s trucking company. Instead of waiting 30 to 60 days on a customer payment, he received 90% of the invoice value within one day from the factoring company. That allowed Brett to immediately put that money to work in helping to grow his business. Over the course of a year, invoices from Brett’s trucking company increased from $50,000 per month to more than $150,000 per month. During that same time period, Brett’s fleet expanded from two trucks to 10.
The Fast-Growing Staffing Services Company
Jeff formed his California staffing services company in 2008 and began factoring the company’s accounts receivable soon afterward. Despite a slow economy, the staffing industry has grown in recent years as employers seek short-term workers to meet demand.
Jeff’s company has experienced explosive growth, thanks in part to factoring. The ability to finance invoices within 24 hours and put that money to work has led to double-digit revenue growth for every year Jeff’s staffing company has been in business.
In 2014, Jeff’s company acquired a competitor, which more than doubled revenue immediately. The company began billing $8 million in invoices per month. Fortunately, Jeff’s factoring provider was able to scale up its financing to match the staffing company’s overnight expansion. There was no interruption in the factoring of receivables, as the factor was able to perform due diligence on the new acquisition’s customers in less than a week.
Jeff’s experience illustrates a key benefit of factoring. Unlike traditional forms of financing, factoring can grow as your company grows. Even an immediate boost in revenue can be matched by factoring with minimal paperwork and reporting. This is an advantage over the inflexible loan agreements offered by traditional banks.
These are just two examples of the ease and flexibility of factoring. Whether your company is in transportation, manufacturing, oilfield services or any number of other industries, factoring is an effective way to quickly build more cash flow. For more information about factoring, check out our free resource, Your Compete Guide to Factoring.