Friday, January 31, 2003

Factoring your AR
With Don Clayback

Q: Lately I’ve seen some discussion about factoring accounts receivable as a way to help cash flow. Is this a viable option?

A. Factoring is the purchase or sale of a business’ invoices for cash at a discount. It has several advantages over conventional forms of funding, such as bank loans. These advantages can include speed of funding, access to larger amounts of cash and independence from your company’s credit worthiness.

Unfortunately, there are two significant catches. First, it can be much more expensive than borrowing from a bank. Second, the company typically remains obligated for the follow up and ultimate collection of the invoice.

Whether factoring is for you depends on your alternative financing options and the outlook for your business. For any company making the switch from bank financing to factoring, strong growth prospects are essential. Since factoring can be much more expensive than traditional borrowing, a company must be able to afford the higher charges by increases in revenue and profitability. If you pursue factoring, be very attentive to the details of your agreement.

For companies that desperately need cash, the good news is factoring can provide some short-term relief. The bad news is it’s really not meant to be a long-term financing solution. For most HME companies, factoring is not the way to finance the business. The secret to good cash flow is watching your revenue mix and operating with a strong billing and collection system that begins at intake and ends with the bank deposit.

Don Clayback is v.p. of networks for The MED Group. Reach him at 716-835-1728.