Is Factoring of Accounts Receivable a Good Sign?
One has to always be a bit wary of the impressions being made by financial acts, particularly in this market where even stellar companies can’t get credit. So, is factoring of accounts receivables a good sign?
For some odd reason, people tend to associate factoring with something bad. The reason for this is they tend to look at factoring much the same way that people look at cash advances on paychecks. There is, however, a critical difference between the two.
If you take an advance on a paycheck, what are you getting for it? Immediate cash to pay bills for food, housing and the like. What is long term benefit of it? There is none. Whether you did an advance or just waited till your check came along, it makes no difference in the long run. Now contrast this with factoring.
When you sell invoices, what are you getting for them? You are getting cash just as you did with a paycheck advance. The difference, however, is there is a long term benefit. You are using the money to meet the debts required to fill that order. In most cases, this means the orders you have are sizeable and you need help filling them. Think about that for a minute. What does that mean? It means that you are a GROWING company. Let’s consider an example.
I build a revolutionary backpack that can be used to carry seriously heavy weights across long distances with a minimum of effort. The military gets wind of my product. After a few tests, they decide this is the greatest thing since sliced bread. The order 500,000 backpacks. I have no way of filling this order without first factoring the invoice to get the necessary money to buy materials and pay my labor. Does this mean I’m a bad company? No! The factoring of accounts receivable is a very good sign!
I can see how someone might question the concept of factoring, but this knee jerk reaction is simply wrong. Most financial institutions view factoring as a good sign that a company is expanding, not a bad sign that it is failing.