Selecting a Factoring House
What you expect of them
What they expect of you
This is a big topic, so let’s take a hypothetical business and follow its progress in finding a factor.
John Edwards owns an auto parts and repair shop, JE Automotive. He loves what he does, and he’s good at it. Unfortunately, he needs to pay his inventory on a 30-day basis. But some of his customers are not able to take care of major parts and repairs in a single payment. And he has a couple of large business customers for whom he provides service on a fleet of vehicles. Even if they pay on a 30-day basis, he winds up carrying several thousand dollars a month for each of them.
Therefore, he’s decided to sell his receivables. He wants to find a place that will take much of the A/R process out of his way so he can focus on what he does best. He’s looking for a place that will do the following:
Selling Your Receivables - The Pros and Cons
So you’re considering selling your invoices/receivables. You’ve heard about it, maybe even known someone who’s doing it. But you’re not sure if it’s for you. How do you go about making that decision?
Your first step is to define your reasons for wanting to sell your receivables.
Frequently the major reason is immediate cash flow. If you carry your own receivables, you need deep pockets to keep your business afloat until your customers pay their bills. While you wait for your customers’ payments, your cash is tied up, unavailable for your inventory, payroll, utilities, and other expenses.
Or your business may be growing. In that case, you probably need more inventory and/or working capital than your current budget will handle.
Is handling your own receivables taking too much of your time and office resources? Some receivables purchasers will take care of your entire A/R procedures. You simply create the invoices and send them to your receivables handler. Your receivables purchaser sends out your monthly statements, receives payments, follows up with collections on slow pays, and may even create payment plans to fit your customers’ needs.
There are many reasons for considering selling your receivables. But before you start looking for a receivables purchaser, be sure you know exactly what your reasons are. Make a comprehensive list of all the benefits you hope to gain.