Factoring: A Surefire Way to Get the Money You Need Right Now for Your Small Biz

Before I ran my staffing agency, Inkwell Editorial, in New York, I didn't know anything about factoring. But, I'd gotten myself into a real financial pickle, and my business mentor recommended that I use one.

The Number One Problem of Small Business: Cash Flow

As with most small business, I had a cash flow problem. I ran into financial trouble when my clients weren't paying on time, but I still had to meet payroll. Clients had 30 days to pay, but payroll was due every week.

Remember, we were a staffing agency - and almost all of them pay weekly. When you get a few clients who start to pay around the 75^th or 90^th day, you can run into cash flow problems relatively quickly, especially if you are a small business.

I had figured into the budget that clients would pay at the 60^th day. It's when they started to pay later than that I really felt the crunch. And, as ole law Murphy would have it, this is what happened to me - all of a sudden, three of my biggest clients started to pay late.

Between these three clients there were approximately five employees who had to be paid weekly. And, some of them were logging OT, which really made me feel the crunch.

Looking at what was owed me, as opposed to what I had in the bank made me sick to my stomach. That was when my business mentor recommended I find a factor.

What is a Factor? (NOTE: The proper term is Factor, not "Factorer")

Also known as Accounts Receivable funding and or asset-based lending, according to FountainheadFunding.com factoring is ". . .
Huh, what exactly does that mean? In essence, it means that you borrow against the funds that are owed you.

How Factoring Works

For simplicity sake, say Company A owes you $100. They've been a steady client for the last three years who have run into some cash-flow problems of their own.

A factor might pay you $75 on that outstanding invoice of $100. You can get more based on when the client pays. So, if the client pays the invoice within 30 days, the factor will pay you an additional $10 more of the original $100 owed; if the client pays within 60 days, the factor will forward you an additional $5 of the original $100 owed, etc.