MasterCard / Visa is the largest form of factoring today -- bet you didn't know that! Retail merchants accept your credit card as payment because they have a contract with MC/Visa. This contract allows the retail store/restaurant to expedite their cash flow by receiving the amount you charged (minus a small discount), depositing the money into the merchant bank account within 72 hours after you have placed a charge on your credit card.

Why do retail merchants accept credit cards as payment? Typically, they need the money to replenish supplies. It's simple cash flow management.

What happens if you are not a retail merchant, but rather you deal with other businesses? This is where factors emerged. Factors will assist with the business-to-business transaction where MC/Visa only deal with consumers.

Using accounts receivable as collateral, a factor will expedite the rate you are getting paid by giving you your money within 24 hours after a job is completed rather than waiting for 30, 45, or maybe even 60 days for payment from your customer. Factoring is a great tool for a company who can't yet qualify for a traditional credit facility.

The reason factoring works is that the collateral used to borrow against (A/R) is based on the credit worthiness of your customers. In other words, factors purchase your credit-worthy accounts receivable at a small discount and convert your invoices (sales) into immediate cash. It is for this reason that a factor can also provide a cash flow solution for companies who have experienced negative retained earnings and/or poor profits. Banks will only lend money against proven history that a company is profitable. Typically, a business has to provide a minimum of two years tax returns, profit and loss statements, and balance sheets supporting their profits.

Factoring is not a loan. There is no debt repayment, no compromise to your balance sheet, no long-term agreements or delays associated with other methods of raising capital. Factoring allows you to use your own hard earned assets to create cash for the growth needs of your company.

So, how much does it cost? The key term used in the MC example is discount vs. interest rate. A factor will advance money against a receivable and will charge a discount against the gross invoice amount. This discount can be as little as 1% on up. It is based on risk and time.

There are many ways of controlling financing costs when using this product. If you would like more information about our programs, please e-mail us at info@fwfinancialservices.com or call Harry or Tami at 503-295-2929.