Account Receivables Factoring Examples

An example of using account receivable factoring, sometimes called invoice factoring, to raise capital and increase cash flow in a company:

Mr. Manufacturer, of the Manufacturing Widget Company, was in a bind. He received a request from Customer International for 5,000 widgets a month if he could promise a start-up quantity of 40,000 widgets in 90 days.

Mr. Manufacturer knew that Manufacturing Widgets could do it - he would have to add a second shift and buy another machine - but where could he get the cash by next week to start production? If he went to the bank, it could take weeks - and Mr. Customer needed an answer by Friday, accounts receivable factoring could be the answer!

Then he remembered reading about factoring in a high-profile business magazine. The article said that factoring had been around for years, but
many people didn’t reap the benefits because they simply didn’t understand what factoring was or how it could work for them. Mr. Manufacturer called the good people at Midwest Factoring Group and asked them how a
factoring company could help him use his account receivables to raise capital immediately.

Midwest Factoring Group explained to him that invoice factoring turns his outstanding invoices into working capital through account receivable purchasing. Account receivables purchasing is commonly referred to as factoring, accounts receivable factoring, or invoice factoring. Factoring is not a loan, so he wouldn’t have to worry about the hassles he would normally get from a bank. Rather, factoring is asset based (releasing the funds frozen in account receivables) so the only person he would be borrowing from is himself.

“No new debt?” Mr. Manufacturer asked.

That’s right. No new debt. Factoring account receivables is simply getting the money due to you, only sooner, to help your company grow faster. Midwest Factoring Group didn’t ask for collateral or a personal guarantee. Midwest Factoring Group said they would buy Manufacturing’s Widgets’ account receivables and advance them up to 75% of the value of their receivables. The factoring company would take care of the invoicing, collecting, and reporting for the Widget Company, then pay them the reserve upon collection. The factor would take a portion of the invoice amount as payment, as low as 5 percent to 7 percent, so Mr. Manufacturer would not have a new bill to pay.

“But had they ever worked with a Widget company before?” Mr. Manufacturer wanted to know.

Midwest Factoring Group explained that there are many business plans available in industries as diverse as apparel, accessories, auto parts manufacturing, computer equipment, electronics, furniture, hardware, housewares, medical supplies and equipment, software, contract laborers, staffing agencies and more. They were happy to supply him with the financing program and factoring services that were best suited for his needs.

Mr. Manufacturer was able to call Customer International and take
that new contract!