DaveKocharhook’s Blog

The economic downturn and credit crunch have caused banks to reduce access to business loans and rescind lines of credit. To compound the problem, many companies (possibly your customers) are taking longer to pay on invoices. And yet you are expected to make payroll, pay taxes and settle up with suppliers NOW!

In this perfect storm of economic turbulence, how do you survive?

The answer may lie in the use of the “factoring” model for Accounts Receivable Financing – a funding service used by Fortune 2000 companies but that, oddly, is relatively unknown in the small and medium size business market.

What is Factoring?

“Factoring” is a purchase and sale transaction between your company and the funding agent – the factoring company. It is neither a loan nor a traditional line of credit. It is the sale of a specific financial instrument (an invoice). Consequently it gives you immediate cash without creating an offsetting liability on your balance sheet. It moves you’re A/R asset (which depreciates over time) into the cash column.

Factoring companies can often provide funds when banks cannot because of the three-way relationship of factoring services: you, your clients, and the factoring company. Where a bank will scrutinize your credit before providing a loan, we scrutinize your customer’s credit because they will ultimately pay on the invoice. So our underwriting criteria are different, and in many ways, more liberal than those of a bank.

Is Factoring Right for Your Business?

As a financial tool, factoring is most frequently used in times of rapid company growth or, as now, in times of economic stress. During rapid growth your demand for cash can outpace your cash-flow cycle. In times of economic stress credit is tight and customers take longer to pay.

These are realities of the business cycle. By understanding factoring you give yourself one more option for successfully navigating difficult financial waters.

Mr. Kocharhook is a Business Development Manager for Riviera Finance – a factoring company headquartered in Redondo Beach, CA, that has been providing professional “best practices” factoring services since 1969. He operates in Santa Clara, CA, and can be reached for additional information or consultation at dkocharhook@rivierafinance.com or at 800-336-2223.