By Ryan Velez
It’s a well-known and frustrating fact that Black business owners have to jump through more hurdles to get working capital than 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. With options limited, Black Enterprise presents the idea of factoring as an alternative method to get that all-important capital.
"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.' Black Enterprise puts together the following example:
“– 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.”
The benefits here are that you can continue paying vendors, payroll, and operational costs while this is going on, rather than being forced to have a cash flow crunch while you wait for commercial clients to make payments. This can take as long as 120 days otherwise.
In general, certain industries are a better match for factoring than others. Here are some good examples.
• Oil and gas
• Businesses that work with the government
If you don’t go this route and just want to wait until a client pays in full, consider adding trade credit insurance to your receivables. This could cover losses and give you more leverage when it comes to signing on clients that could be a higher payment risk. Another option is leveraging the account receivables you have for asset-based lending products. Don’t be surprised if you need some form of trade credit insurance on the receivables as well.