Boats And Boating

Often factoring is used to correct a too-long neglected problem the company is having in collecting the monies due it, although this isn’t perhaps the best use for this financing strategy. But if a company’s receivables are aging and prospects of collections are becoming dimmer, factoring is one strategy they may use for dealing with the problem. Any receivables finance company will have expertise in collections. Once they take over a company’s receivables, the management of those receivables will be much more efficient. This presents the factoring company with a tidy profit, while giving the business a good cash flow and an opportunity to hone its collection processes and procedures while the total receivable amount is low and relatively unimportant to the bottom line.

Suppose you own a boat company. Almost everyone who buys a boat in your store uses credit to do so. After a short time in business, you’ve done well and made a lot of sales. Your inventory is lower than you’d like, but since everyone bought on credit, you have a lot of receivables but little cash with which to buy inventory. You go to a factoring company to sell your receivables. The factoring company looks at your total receivables, subtracts an allowance for bad debts, subtracts a bit more as for finance charge and immediately gives you the cash difference. Now you can go out and buy more boats to sell. Most factoring agreements are continuous in nature. So now that you’ve got more inventory and start making more credit sales, you immediately turn over that paperwork to the factoring company, they give you the cash less their subtractions, and they collect on the debt from your customer.

Of course it’s more complex than the above example makes it sound. Most factoring companies, for example, will not buy any receivable that is more than 90 days old. The reason for this is obvious – the older the debt, the less chance it can be collected. Why would they want to buy it when there’s a good chance it can’t be collected, even by experts? Therefore the original business is left with their toughest collection efforts still in house. They can’t eliminate a collections or accounts receivable department through factoring, but they can greatly reduce the amount of employee man-hours spent at this activity. Instead, they can concentrate on their core competencies, in this example, making and selling boats.

Small business, in particular, often find great value in using a factoring company. This way their limited capital isn’t tied up in receivables, and they can focus on growing the company instead of chasing down bad debts.