Finance Alternatives For Franchise Owners; If The Downish Economy Is Affecting You, That Is

Q: How does factoring work?
A: A factor purchases a business�s accounts receivable and gives them a
large percentage of the total creditworthy accounts receivable up front
and the remainder when they are collected. The factor handles all the
credit checks, collects the accounts receivable and ledgers the
receivable so the client is able to concentrate on growing their
business.

Q: How does factoring differ from other types of financing?
A: Factoring differs from traditional bank loans because the credit
decision is strictly based on receivables rather than other criteria �
how long the company has been in business, working capital and personal
credit score, for example � that a bank would take into consideration.
Factoring differs from equity financing in that factors don�t take
equity in the company. Since contracts are short term, the client could
elect to stop factoring whenever they choose.

Q: Who can benefit the most from factoring?
A: Generally, any business-to-business company that has the ability to
increase their sales but are held back because of a lack of capital can
benefit from factoring. The industries that tend to use factors now are
service-based because they have a high labor component (must pay
employees weekly). Without factoring, they wouldn�t be able to expand.
The transportation industry is big; truckers factor because they have
to pay employees and fuel costs every week and truck rentals monthly
and with receivables collected every 45 days, it would be impossible to
grow without factoring. Staffing is another industry that benefits.

Q: What are some common misconceptions about factoring?
A: The biggest misconception is that people believe factors are a
lender of last resort but that�s not true because clients seeking out
factoring are often in the beginning stages of growth. At first glance,
factoring appears to be expensive but does a lot more; in essence,
factoring replaces the accounts receivable and credit department. For
example, if a trucking company is doing $600,000 a year in sales, a
factor may charge 5 percent (or $30,000) per year for financing. In
addition to the financing, the factor will do credit checking,
ledgering and all the collection work, thus saving the company the
salary of an employee hired to handle the same tasks. Most clients
contact a factor for the money, not the service, but they stay with
them after seeing what they can truly offer.

Q: Do you see factoring becoming the norm if these economic conditions continue? Why?
A: With banks becoming more stringent, businesses can�t get the
financing they need but I don�t think factoring is becoming the norm
because many people are still not aware of it. It�s never going to be a
mainstay type of financing because the majority of businesses using it
are in their formative stages. In Europe , factoring is still
relatively new but its volume has increased substantially. Given its
increasing popularity overseas, I think it�s only a matter of time
before it enjoys a similar level of notoriety in North America .

Q: How do factors differ from one another?
A: Businesses in need of a factor have long had only two choices: they
could to go to a large factoring company in a far away city or to a
smaller, local operation. At the larger companies, the client can never
talk to the decision maker like they could with a smaller company.
Conversely, the smaller companies can�t provide the same sophisticated
back office system the larger company can offer. With the advent of
companies like Liquid Capital, the client can have both the back office
perks and direct access to the decision maker, who is a member of their
own community.

Brian Birnbaum is the founder of Toronto-based Liquid Capital. Liquid
Capital is an international network of franchise owners or �principals�
who help small- and medium-size businesses grow and succeed through
�factoring,�

The Wall Street Journal just did a story on factoring. Must read!

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