"Cash Flow is King": How Factoring can give your business the working capital it needs

July 24, 12:13 PMDC Starting A Business ExaminerEvelyn Bandoh

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Adequate cash flow or more specifically, working capital is something that will make or break a business and creative businesses are no exception to this rule. Having working capital can mean the difference between being able to meet a large wholesale order placed by a retailer verses not being able to deliver your product to the market because you do not have enough capital to maintain effective business operations. Nothing is more frustrating than having to turn down a sales opportunity because you don’t have enough capital to manufacture it. More frustrating is the fact that even though a business may make a sale on credit, and the average turn-around for invoice payments is 45 days, there may be circumstances where the business will not receive payment on an invoice for 6-9 months. This delayed payment could cause major cash crunch issues for a creative business that is not well capitalized.

So how do creative businesses go about financing their operations? Some businesses will bootstrap and fund ongoing operations through their current sales. Businesses looking to expand operations will either assume debt via credit cards, a line of credit or a business loan or they will acquire equity by taking on investors. Bootstrapping, equity and debt all have their benefits, but sometimes they might not serve the immediate cash-flow needs of the creative business owner. This is where the concept of factoring may prove beneficial.

Factoring is when a business sells its account receivables (sometimes at a discount) to a financing company to generate cash or when the business finances their account receivables. Similar to the concept of securitization, (when you sell something that will produce a future stream of revenue for cash in the “here and now”), factoring allows you to either sell or borrow money against the value of your receivables in order to generate working capital. Sometimes the factor proceeds may also help cover the cost of manufacturing the inventory in question and a major benefit of factoring is that the factor assumes the credit risk if a retailer (willingly or unwillingly) does not complete payment on an invoice. Over the years, factoring has sometimes gotten a bad rap, being called a “high-end” pay day loan, but like any other type of financing arrangement, business owners have to be responsible borrowers and learn about the ins and outs before signing on the dotted line.

To provide an insider perspective on the world of factoring, EAB interviewed Tim Moore, with Hilldun Corporation, a Factoring and Financial Services Company headquartered in New York, NY.

EAB: What exactly is a "factor"? :

TM: A factor is a financial institution that advances funds against invoices and collects from the debtors [for example, retailers that place wholesale orders with you, the designer] to repay the advance. Factors also take the credit risk. If debtors, due to financial inability, are unable to pay the designers invoice, the factor will pay the client [designer] for the unpaid amount.

EAB: How does the factoring process work?

TM: When an order is received by a factored client [in this case, the designer], they check with the factor for credit approval to invoice on the agreed terms. Then if the client determines they are shipping the items to the debtor [in this case, the retailer] on terms, they forward the invoices to the factor for collection purposes, and generally ask for an advance of funds-typically up to 80% of the invoice value. (EAB’s note: the invoice advance is used as working capital for the business). Upon receiving payment from the debtor, the factor takes repayment on their 80% advance and sends the client the remaining sales proceeds minus the factoring fees. Factor fees generally cost 2 to 3% of the invoice total.

EAB: In general, what types of clients do factors typically work with? What about Hilldun? What types of clients does your company prefer to work with?

TM: Factors work with almost any business that has receivables with other businesses. Industries which are most prone to use a factor are importers, manufacturers in textile, apparel, giftware, home goods, jewelry, home furnishings, machine parts, and electrical supplies, personnel agencies, consulting businesses etc. Hilldun’s specialty is working with better-end apparel companies; however Hilldun is active in most of the industries previously listed.

EAB: Business wise, what should a client have in place before they approach a factor to establish a financing relationship?

TM: A business plan that makes sense with goals which are achievable. However, most factors would like to see orders in place before bring them on as a client.

EAB: What should a client look for when they are seeking out a company to be their factor?

TM: They should look for a factor that understands and has some experience in the type of industry they are in. They should also inquire about the systems used for accessing information-many factors are online with real time data. Also inquire about [interest] rates which can vary greatly from factor to factor. Inquire about the specific way in which the factor manages the advances. For example: does the factor batch invoices and advance against each batch separately or does the factor advance against the total amount of receivables as a whole.

EAB: How are contract terms negotiated between the factor and the client?

TM: First there should be a clear understanding of the terms under the agreement, most of the terms are there to protect the lender and are typically not all that flexible. The Factor should clearly understand the needs of the client and make sure the terms reflect those needs. Terms of the contract may be negotiated after all the facts are clear and before signing of course.

EAB: Do you have any tips that might be helpful to anyone reading this article, who might be interested in more information about factoring?

TM: It’s a good idea to do some research online about the concept of factoring and then speak with a knowledgeable representative at Hilldun or another quality factor. Do not fear factoring as it is the most highly used form of financing in the world. Credit cards are an example of a factor for consumers. If you understanding how a credit card works for consumers, you will better understand how it works for wholesalers, designers and other creative professionals.

EAB: What is the best way for people to contact you if they have questions?

TM: Tim@hilldun.com or 212-244-2600 x131 or cell 609-462-6565.

To comment on or ask questions about this article, please send an email to info@eabplanning.com.

To read more about Hilldun and factoring, please visit the following links
Hilldun Corporation:
Inc.com Article
Portfolio.com