Factoring is when you sell your invoices to an investor and get
paid immediately, instead of waiting 30-60 days or longer. Home
based businesses can use factors, just like the big guys do. You
have to remember, though, that factoring is for business to
business transactions. It cannot be for jobs you do for private
consumers.
Example: you have a catering business you run out of your own
kitchen, with a helper or two. You cater a party for Mr. and
Mrs. Johnson for their 25th wedding anniversary. You can't
factor that job, because it is to an individual. But when you
cater the Christmas party or the 4th of July picnic for Mr. and
Mrs. Johnson's workers in their machine shop, you can factor
that job because it is to a business.
The same is true for cleaning/janitorial businesses: cleaning
offices can be factored, cleaning houses cannot. The same story
for landscapers: mowing lawns of homes cannot be factored, lawn
work around office buildings can. I could go on and on;
photography, remodeling, gift baskets, bakery, tax preparation
and almost anything you can imagine. It usually doesn't matter
what the product or service is, it just has to be a product or
service that is delivered and billed to a business.
The credit worthiness of your customer is the most important
thing the investors look at to decide if they will purchase your
invoices. Your financial health and history will be looked at,
but the decision is based mostly on your customer's credit.
You will have to show an A/R aging report of some sort. If you
use QuickBooks or a spreadsheet it is easy to generate a report.
This shows the history of the payments: the day you invoiced a
business and the day they paid. Receivables that are paid in
30-45 days are much more inviting for a factor than the ones
that are paid in 90 days.
When you turn in the invoice to the factor, you receive an
advance of 75%-85% and you'll get the rest of the invoice amount
when that bill is paid, minus a small fee. The fee for monthly
volumes of less than $10,000 will be higher than larger monthly
amounts. Fees for payments made past 45 days are higher than
short term payments. Fees for a lot of very small invoices each
week or month might be higher too, since there is much more work
for the factor to do. (Each invoice is verified.) Often, your
customer will allow you to put several jobs on one invoice, this
will be easier for the factor and probably for you and your
customer.
If you factor invoices and get paid right away, just think what
you could do: pay your bills earlier and build your credit, buy
more advertising, purchase supplies for your next jobs, get
quantity or early payment discounts from your suppliers, hire
more help.
Your business, regardless of how large the monthly billing
becomes, can always remain home based. It does not have to be in
an office building, especially with the ease of communication we
have now. It is often a good idea to have your business
incorporated or registered as an LLC, since this gives you some
liability protection.
Ask your cashflow broker for advice. A good broker will have
choices and suggestions for you and work with some factors who
work exclusively with small businesses. Many factors have a
monthly minimum of about $25,000, but there are some who
specialize in small businesses that generate much less than
that.
If you decide to try purchase order financing, it is a little
different. The purchase order probably should be at least
$25,000 for a funder to be interested. It is also more
expensive, since you have to pay a fee for this money and then
factor the invoice when you issue it and also pay the factor's
fee. Many businesses do this rather than refuse a big purchase
order. It will often lead to many more jobs and in the long run
could be very beneficial. As they say, "80% of something is
better than 100% of nothing". Obviously you have to have a very
good profit margin in this job, or plan to make less on this one
in order to get the next orders from your customer.
Don't think that factoring is only for big companies, they
started as small companies at one point and there is a good
chance factoring helped them become the big companies they are
today.
About the author:
Donna Poisl is President of Creative Funding Solutions. CFS
works closely with several of the best factors and p.o. funders
in the country, each with different rates, fees and requirements
and is able to find the best one for each client. Contact Donna
at
http://www.solvecashflowproblems-factoring.com
