The current credit crunch means that banks are less likely to approve business loans and more likely to revoke lines of credit. One option some businesses have considered is factoring, a financing tool that gives companies the capital they need to operate.
At the Bottom Line Blog at Expert Business Source, Shanu Singh Guliani of Guliani’s Fine Jewelry explains that factoring involves selling invoices at a discount for immediate cash. Factoring companies make money by charging fees for their services. Since most don’t insure against non-payment, she says businesses may need to pay back the money advanced should their customer default.
Bert Goldberg, executive director of the International Factoring Association, gave Wall Street Journal reporter Kelly Spors more insight into the business of Factors:
- Fees typically range from 2% to 6% of the invoice amounts, depending on how long it takes the factor to collect the client payments and the credit-worthiness of clients.
- Factoring is generally much costlier than a traditional bank loan since a business might pay 3% of the invoices’ outstanding amounts over a 30-day period to a factor, compared with something like 8% or 10% interest annually on a bank loan. Factors charge more because they have to do credit checks on the invoices they buy as well as administrative work like billing the clients.
- There are around 700 factors in the U.S. A free referral service called “Factor Search” can be found at Factoring.org.
Take The Tip:
More facts about factoring can be
found at the Wall Street Journal Small Talk blog by Kelly Spors, click here to read more.
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