The economic downturn and volatility of the financial markets has left a large number of established businesses with difficulty managing cash flow. Cash-strapped businesses, big and small, are paying their bills more slowly than ever. It’s a cash flow river — or trickle in this case — that flows downhill, impacting the businesses below that require healthy cash flow to operate effectively.

As larger companies and small business owners have trouble paying their bills, they are quickly discovering fewer and fewer options. Banks are not lending and credit lines are stressed. What many businesses owners and managers don’t know or have not previously considered is the possibility of factoring.

For small to mid-size companies doing business-to-business or business-to-government transactions, factoring may offer a financial solution that will keep the doors open and even help them grow.

Factoring is a form of financing based on a company’s accounts receivables or billing invoices. A company with slow-paying customers who pay between 30 and 90 days will approach a factoring company to provide cash. The factoring firm will make an advance of 80 percent to 85 percent against the company’s billing invoices for a percentage less than they are worth. The factoring firm charges a fee for the advance, which is based on how long the advance is outstanding, then provides the company with cash as if the bill had already been paid, and the factoring firm collects on the invoice itself.

The result is the factoring firm can help close the cash gap by advancing funds on earned, unpaid invoices so the company can use the funds to pay daily operating expenses such as payroll and vendors. Factoring will usually give business owners more availability of funds than a bank. In addition, factoring funding can be available within a day or two after the application process is complete. The best factoring firms make factoring fast, easy and flexible.

Factoring differs from a bank because factors make funding decisions based on the credit worthiness of a business’ customers. Banks, on the other hand, make credit decisions based on a company’s financial history, cash flow and collateral. Most importantly, a factor makes funding decisions in days or hours, while banks generally take weeks or even months.

This was precisely the case for Phoenix-based American Printhouse, which provides design and screen-printed apparel and accessories to local and national accounts. Its clients include Chaps Ralph Lauren, Calvin Klein, Disney, Liz Claiborne, the U.S. National Parks Service, Sony Signatures, the Arizona Diamondbacks, the Phoenix Zoo and Discount Tire, to name a few. Garments created and screened at American Printhouse are then sold to 1,500 independent specialty retailers and larger clothing retailers such as Hot Topic, Urban Outfitters, Buckle, Dillard’s, Kohl’s and Target. The company offers 12 different types of printing options for its garments.

Despite employing a staff of 15 and securing an impressive book of accounts on a local and national scale, the company still found itself experiencing the effects of the tightened financial markets.

“We really started feeling the slowdown and clients began asking for net 60 (day) terms beginning in September,” explained Sam Akkad, president and CEO of American Printhouse. “Then we hit the slow season and I was looking at the possibility of layoffs and difficulties paying the rent.”

After multiple banks refused to give the company a loan, and they received notice that their credit card lines were significantly reduced, the building owner suggested factoring. After learning more about factoring in late 2008, the company received $75,000 against their receivables in January 2009, within days of submitting an application for funding. This got them through a rough spot and allowed Akkad to turn things around.

“We didn’t have to do layoffs and today our business is booming,” Akkad said. “We have experienced 125 percent increase in revenue, we are adding new lines of business and looking at hiring.”

Johnny Benson, president of USMX, likes the flexibility factoring allows. Benson joined the company in the 1990s and served as the general manager for a number of years. In early 2008, he purchased the company despite its large debt load due to slow-paying customers. Benson was familiar with factoring and knew the banks would not be favorable to providing a loan or line of credit given the nature of the business.

The company is an environmentally friendly tire recycling facility in Phoenix that fabricates raw product and sells it to be used in playgrounds, artificial turf, molded rubber piping and landscaping. The company picks up tires at retail outlets and other locations throughout Arizona. USMX also cleans up areas where tires have been dumped, both for the state and for private land owners.

The business is growing due to more stringent regulations in recent years pertaining to the disposal of tires. But in order to continue growing, better cash flow is required.

“Working with a factor that allows you to select which customers and which invoices you want to factor is the ideal situation,” Benson explained. “We use factoring as a tool to bring cash flow in order to run our day-to-day operations.”

Regardless of size, factoring can work for companies seeking to fill the gap between invoice payment and payroll, purchasing and other business expenses. If businesses work with a flexible factoring firm, they also have the option of making factoring a big or a small part of their working business plan. Also, while long-term factoring relationships do contribute to a healthy, prosperous business, it would be best to seek out firms that consider factoring a shorter-term relationship. They will be the firms to help get your cash flowing again.

Factoring 101

Questions to ask when considering factoring:

  • Do I have to factor all my invoices?
  • Do I have to factor a minimum amount each month?
  • How much can I factor?
  • Where do my customers send their payments?
  • What fees will I pay?