Factors loan money using a company's accounts receivables as collateral.

How It Works: A factor has the owner fill out forms that personally guarantee repayment of the loan. The factor has the owner sign a paper that allows them to run financial checks on the company's clients. If the clients are good payers, the factor will loan between 70 to 80% of the value of the account receivables at a rate of 3% per month. This translates into an effective borrowing rate of 36 percent per year

The owner must provide the factor with copies of all accounts receivable invoices, regardless of whether they are factored or not. The invoices must also contain the address of the factor, which will receive all future payments until the relationship is over. When the factor receives the balance of the receivable, they repay the company the remaining 17% of the invoice. Typically, if payment by the customer is received after 30 days the factor and an additional 2% subtract another 1% if the payment isn't made for 90 days.

Preparation Expectations: Factors want to receive business plan and past and current accounts receivables. They want a list of the current account receivable contacts along with their addresses.

Advantages: This is a great source for short-term capital. Once the relationship is set up, a company can receive money within 24 hours of every invoice sent out once accepted by the factor. Outside of the clothing industry, most factors will tell their clients that if the client is using factoring for more than a year, there is something wrong with the business. They also may come across potential clients for their customers.

A client of mine wouldn't have survived without the ability to factor receivables. The firm she used was run by experienced business professionals, and they provided both money and business advice. Good factors provide more than money, because most factors have run or worked with a variety of businesses.

Disadvantages: The annual interest rate is 36% on a compounded basis.

How To Keep Them Happy: Make sure the address of the factor is on the invoice and let them know immediately if any mistakes in billing have been made or if the ability to collect will be a problem. Most factors are former bankers and business people; therefore use their knowledge and experience when tackling problems.

Internet Address: http://www.amer-rec.com.