Factoring / invoice discounting or line of credit?

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Factoring / invoice discounting or line of credit?
Posted by: Guest_John Sep 2 2004, 08:13 PM
My business has taken off in the last few months and my friwnd who is doing the bookepping for me told me that we need a line of credit from a bank to help our cash flow. we went to see the banker, but he told us that for our company it was beter to get a factoring loan. He called it “invoice discounting”, and he told me that this would be muchbetter because it will finance only when we need the money and it works together with the sales.

What do you thin?

Thank you for wathever advice you can give me, this is a very good site.
Posted by: Commercial Lender Sep 3 2004, 01:31 AM
Its a subjective Question…….it depends on you business and A/R. What percentage of your sales are net 30, and what % are more. You will have to involve an accountant to take a look at your financials to determine if and AT WHATdiscount, factoring should be invoked.
Posted by: loanuniverse Sep 3 2004, 10:18 AM

I look at this from a different angle. Having helped manage a small factoring program with about a dozen customers a few years ago, I can tell you that the overwhelming majority of times, it is more beneficial to the borrower to obtain a line of credit instead of signing a factoring agreement. I am not just saying that because you get lines of credit at banks (coincidentally where I work}, and you get into factoring agreements with finance companies. There are at least two benefits from going with the line of credit over factoring and they are as follows:

Pricing: This is the big one. Factoring can get expensive really fast. Because the way factoring usually works is that the finance company buys your invoices at a discount a funny thing happens, to illustrate lets use some examples:

You sell 100,000 worth of merchandise a month.
You get paid on average 45 days after you invoice.
The factoring company charges you a 3% discount on each invoice.

As a result you are paying 3% to use that money for 45 days. Taking into consideration that the year has 365 days, you are paying 365 / 45 = 8.11 X 3% = 24.3% . If my employers could charge businesses 24.3%, they would be able to pay me what I think they should.

Work Because the factoring company works by buying the invoices, some will require that you fax them the invoices daily as they are generated in order for them to advance the money. At worst an ABL line of credit will require monthly reports.

Having said that, the fact is that a lot of businesses that do not meet the underwriting guidelines of bank lenders have to go with a factoring agreements. However, we see every day lots of businesses that have “grown out” of factoring after being in it for a year or two and are ready for bank lending. Just the other day, I was teaching some of the trainees how to do some analysis work and I used the financial information of a customer that is currently in factoring and was able to determine that their funding was costing them about 22% a year. I use those examples to drive a couple of points to them {first: We are in the wrong business} and {second: If you are able to save a customer about 15% on their cost of funds, you gained a customer for life that should worship the ground that you walk on}.

Good luck
Author: Commercial Loan Underwriter