SAL VOLPE IS a master plumber for 19 years and owner of Outerbridge Mechanical Group in Staten Island, N.Y. In 1995, he started using a form of financing that improves cash flow with no debt, is fast, does not require giving up ownership or control, is readily available and grows as fast as sales. This form of financing is called factoring. Here's how it works:
Your company provides a product or service and issues an invoice to the customer, who takes 60 to 90 days to pay. Rather than wait, you sell the invoice to a business known as a factor. The factor will verify that your customer has the means to pay, that he has received the product or service, is satisfied and plans to pay.
The factor pays you in two parts. It pays an advance, which is a percentage of the invoice face value. Then it waits to be paid. When your customer pays the factor, it deducts its fees and sends the balance to you.
"I started my business from a hole in the basement in Brooklyn, N.Y. with no money, just me and my tools," Volpe says. "Starting with guts and no funds can only take you so far, so in 1995 I started to use factoring. The other subcontractors told me I was crazy, but they started to notice that my company quickly grew from 10 men to 20, then to 30.
Banks and factors are not competitors.
"As my cash flow improved, I started to discount my supply house bills, which helped offset the percentage I was paying to the factor. I still swear by the same factor. The key to the construction business is cash flow. The funding company is a tool. Used the right way, it can only help."
Factoring has a number of benefits.
- Factoring is quick. After the relationship is established, funding can be within 48 hours. You can then do business you would otherwise have to turn away, and take advantage of trade and material discounts.
- Factoring is available. With some factors, your company does not have to have a minimum track record or good credit.
- Factoring is simpler and easier than applying for a loan.
- Factoring is a sale, there is no debt incurred. This improves your company's net worth.
- You don't give up ownership or control of your company.
- Factoring is the only form of finance that grows with sales. As you issue more invoices, more cash is immediately available.
- Factoring is flexible. Factors can be very flexible when dealing with problems. Prior liens are not necessarily deal breakers, as long as they are disclosed up front.
- Factors keep track of accounts receivable and collections. This can save a lot of time and money for a small business.
- Factors provide quality assurance. A factor assesses customer satisfaction with the product or service, which can help you better meet your customer's needs.
When comparing costs, consider that factoring offers a better combination of availability, speed, flexibility and services than any other form of financing. It creates opportunities for a level of growth that is not otherwise possible. Also, factoring is less expensive than offering net 30 days, with a 2% discount for 10 days or less.
The final word on the cost of factoring is: It depends on the customer and his credit, on the volume of the invoices and on how long the invoice remains open.
Each deal is unique and fees and advances can vary quite a bit. There are ways to minimize the cost, but the benefits of factoring usually more than offset the cost. The most important thing is whether you get to keep more money by factoring than you would have by not factoring.
Other things to consider.
Banks and factors are not competitors because they each do things that the other one can't. It's not unusual for them to refer business to each other as the needs of the client change.
Factors come in all sizes and flavors. Some won't touch deals of less than $100,000 per month, some won't do more than $50,000 per month. Some won't buy construction or medical invoices.
A cash flow consultant has access to a large number of funding sources and will make the best match between a funding source and your needs. To see if factoring makes sense for your business, contact a cash flow consultant or check for factors in the Yellow Pages.
Michael S. Curtin is a cash flow consultant and the owner of MSC Funding. He can be reached at 909/790-2411, or at [email protected].