Factoring Overview: Factoring is a financing option in which firms raise cash by selling their accounts receivable at a discount from face value. Most factoring transactions made today actually are structured to be more like short-term loans with receivables pledged as collateral. Under this scenario, the firm pledging the receivables in return for funding still retains the risk associated with uncollectible receivables.
Factoring Terms and Conditions: In a typical factoring transaction, the borrower receives an upfront cash payment equal to about 80% of the face value of the receivables. When the receivables are collected in full by the factoring firm, the borrower gets paid the other 20%, minus a fee. Fees of about 3% per month (which is the equivalent of 43% per annum) are not uncommon, making factoring an expensive way to raise cash, but a necessity for companies that cannot secure a bank line of credit on reasonable terms.
Factoring Franchises: Two companies offer franchising opportunities for individual entrepreneurs who seek to open up their own factoring businesses. These are:
- Interface Financial Group of Irvine, CA
- Liquid Capital of Toronto, ONT
According to an article in the May 11, 2009 issue of Forbes magazine, successful factoring franchisees tend to be former executives, especially those who can add value for their clients by offering timely business advice. Necessary startup capital easily can exceed $300,000 for a combination of franchise fees, setup costs and seed capital for initial purchases of receivables. Finding clients and building an adequate book of business can take months, even a year or more.
