Alternative Ways to Find Capital

by Chuck Carter, President
Carter Funding Corporation

Memphis, TN… John's business was really booming. He added three production workers, two sales representatives, additional inventory and some new equipment to keep up with the demand. Sales had really picked up and the market was HOT. Only one problem…….John was running out of cash. He had leveraged all of his fixed assets at the bank to buy the new equipment and to increase his inventory. His credit line was Maxed-out and the bank could not increase the limit. John had a serious problem. Sound familiar? Fortunately for him, his office manager suggested he call a local Factor. Within 3 days John had the extra money he had desperately needed. At last he could focus on growing the business and not on scrambling to make payroll.

So, what is Factoring? It is a simple process whereby the business sells its invoices or accounts receivable to an investor called a Factor at a small discount. The business gets the cash today and the Factor waits 30, 60, or 90 days to get paid.

Virtually every business day companies like John's are rejected for commercial loans at the bank. Now, the banker isn't a bad guy. He just works under a different set of regulations… regulations that will often not allow him to make loans even if he wants to.

Banks must look at fixed assets, length of time in business, profitability and financial statements. Factors look at the quality of your customers, the average size of your invoices and the volume of business your company does.

A Factor provides a service for the business community much like that of a credit card company. For example, a business accepts a credit card, receives payment by making a deposit that same day, and pays a small fee, normally 3 to 5%, for the privilege. The credit card company then accepts the responsibility of collecting from the customer. A factoring relationship operates much the same way.

Can your business afford to Factor? Suppose you could double your revenues if you had adequate cash flow. Factoring opens up cash flow. Consider the example in the table below:

 
WITHOUT FACTORING
Sales $1 million 100%
Cost of Sales $600,000

60%
Gross Profit $400,000 40%
Operating Costs $380,000 38%
Operating Profit $20,000 2%

 

WITH FACTORING

Sales $2 million 100%
Cost of Sales $1.2 million 60%
Gross Profit $800,000 40%
Operating Costs $600,000 30%
Operating Profit $200,000 10%
Factoring Expense $50,000 2.5%
Net Profit $150,000 7.5%
 

The profit increase due to increased cash flow is normal because you now are utilizing your fixed assets more efficiently. Factoring works because it gives a company immediate cash, thereby increasing the company's ability to purchase additional materials and labor which allows for increased productivity and sales with the same capital base. The expense of factoring will vary according to your circumstances and the strength of your debtors.

Commercial factoring has been around for hundreds of years, but the last 40 have been the most active for Factors. In 1993, more than $250 billion in receivables were factored in the United States alone.

One word of caution: Shop for a Factor just as you would with any other company offering you a service. Compare fees, advances and, most importantly, the reputation of your Factor. Remember, you may not remember the price you paid but you'll always remember the service you received.


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4938 William Arnold Road • MEMPHIS, TN 38117 • (901) 685-1571 FAX: (901) 685-1579
P.O. Box 770416 Memphis, TN 38177-0416

 

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