How Black Business Owners Can Use AR Factoring For Funding - Black Enterprise
Black Enterprise Magazine July/August 2018 Issue

It’s been a well-known fact for some time now, that African American business owners have a more difficult time accessing capital, compared to their white counterparts. The Washington Bureau of the National Urban League reports that since 2008, 93% of the over 1,800 FDIC banks that closed in America were located in low-income neighborhoods that would traditionally serve African Americans. So when the traditional system isn’t working, black business owners have to turn to alternative sources for capital. One option is Accounts Receivable Factoring (A/R Factoring).

 

How A/R Factoring Works

Estimates state that A/R Factoring dates back to the 1600s. With the service you will have a factor (buyer) and a seller (business owner) with outstanding commercial invoices (account receivables) of clients that the business has allowed 10 to 120 days to remit payment, using a process known as “Net D.” The factor purchases some or all of the outstanding invoices and advances around 50% to 70% of the amount to the business owner upfront, then once all of the outstanding payments are remitted within the remaining 10 to 120 days of the invoice structure, the factor will provide the remaining 30% to 50% of the balance minus a discount fee that ranges from 1% to 7% depending on the credit, business health, and financial stability of the business owner’s clients.

Here is an example of how it works:

– Timber Manufacturing has $527,000 of outstanding invoices from 10 commercial clients, with an outstanding “average age” of 50 days remaining before complete payment is due.

– JJ Factoring Co. reviews the credit and other business/financial status of the 10 commercial clients and decides to purchase the entire $527,000 of outstanding invoices with a discount fee of 5% to Timber Manufacturing.

– JJ Factoring advances Timber Manufacturing $316,200 (60%) of the outstanding invoice totals today. Then after all payments are complete, the remaining $184,450 would be forwarded to Timber Manufacturing which includes the 5% ($26,350) discount fee.

Non-Recourse Preferred

If you are going to utilize A/R Factoring, make sure it’s done on what’s known as a non-recourse basis, where if the clients do not complete payment as scheduled then the risk of non-payment falls on the factoring company.

Benefits of A/R Factoring

A/R Factoring helps your cash flow by allowing you to continue paying vendors, payroll, and other operational costs today, rather than having to potentially have a cash flow crunch while you wait up to 120 days (depending on your policy) for your commercial clients to remit payment.

 

Best Industries For Factoring

Just about any business that offers commercial clients 10 – 120 days to remit payment in full might be candidates for A/R Factoring, but the typical industries/sectors that utilize the service the most include the following:

  • Construction
  • Janitorial
  • Oil and gas
  • Manufacturing
  • Textiles
  • Printing
  • Trucking
  • Staffing
  • Healthcare
  • Security
  • Telecommunications
  • Businesses that work with the government
  • Importers
  • Exporters

If You Decide Not To Factor Your Receivables

When you decide to not factor your account receivables, they usually sit on your balance sheet as an asset. If you plan on just waiting until a client pays in full you can do a couple of things:

– You could add trade credit insurance to your receivables which helps cover losses from the unfortunate situation of your client’s not paying on time or all of the outstanding amount due. Trade credit insurance would also provide more leverage in assisting to sign on clients that might be of a higher payment risk.

– You could also decide to leverage your account receivables for asset-based lending products, using your account receivables as security (also called Accounts Receivable Financing). If you go this route, the lender providing the asset-based loan or line of credit will usually require that there’s some form of trade credit insurance on the receivables as well.

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John Tucker

John Tucker is an M.B.A. graduate, with over 11 years of experience working within the Commercial Finance sector. For over 11 years, Tucker has helped large and small businesses succeed through innovative financing, technology and risk management solutions, which have helped grow, develop, and sustain their business. Tucker established himself financially from being homeless, to today having a net worth in the high percentile range. Besides holding an M.B.A., Tucker also has three bachelor's degrees in Accounting, Business Management, and Journalism, with alma maters that include The University of Michigan and Western Governors University.


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