Corporate Financing
Three years ago, Jesus Perez needed financing for his new clothing manufacturing company. But he knew exactly where to turn. "I had used factoring before and I knew I wanted to use it again," he said. "It frees up capital you need to expand the business and it generates cash flow instead of waiting for the (department) stores to pay up."
Apparently, other South Florida firms are also turning to factoring, a method of corporate financing where firms turn over their accounts receivable to financiers for cash advances.
Capital Factors, the regions largest factor, said it has expanded its list of clients to include health care firms, temporary employment agencies and home furnishing companies. It even has a client who does air-conditioning duct work.
"We're working with a host of small- and medium-sized businesses that in the past would not have gotten this kind of financing," said the CEO at Capital Factors.
But account receivable loans have plenty of local competitors. The list includes a subsidiary of Fort Lauderdale-based Bank Atlantic and Barnett Banks, which offers factoring as an option to businesses that do not qualify for mainstream financing packages. Why is factoring, which has been around for hundreds of years, gaining greater attention nowadays? Part of the reason is that South Florida's service-oriented economy is spawning companies that need financing but do not qualify for traditional financing, such as small business loans or letters of credit. So they are looking to factoring, which works more or less along these lines. Say your company generates $ 100,000 a business cycle, whether it's a month or 90 days, in receivables but you cannot get a loan or line of credit. A factoring firm will advance you $ 80,000 in financing backed by 80 percent of your firm's receivables. It will also require you to place another chunk of your receivables on reserve to guard against non-payment by your customers. The money you are advanced can then be used for whatever purpose you choose _ whether to meet payroll or pay off suppliers on a steady basis instead of having to weather a crunch every 60 or 90 days. In short, factors are buying, or guaranteeing, your receivables although ultimately your firm may be liable if customers do not pay up. Well, the factoring company will charge you around 2 percent _ or $ 2,000 worth of receivables _ as a fee. In some cases, they will charge you up to 4 percent for the first payment cycle and then a lower amount for each month thereafter. But factoring companies will not accept everyone. For example, Capital Factors requires a potential client to have a diverse customer base where none of the firm's clients accounts for more than 25 percent of the total revenues. And some critics say that factoring is not a long-term solution. The knock against factoring is that it can be a more expensive form of financing because a company is charged cost of capital, usually between 2 percent and 4 percent above the prime interest rate, for the money that is being extended.
Account Receivables
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