Credit Card Factoring Offers Cash Flow Solution for Restaurants and Retailers - By: J. Terrence McDermott

If any industry has seen a silver lining during the dark clouds of the current recession, it is the receivable factoring industry. Many smaller to mid-size business have been placed in a cash flow crunch as their customers are taking longer and longer to pay their bills and credit through standard lending institutions has become more difficult to acquire. Suddenly, invoice factoring, which undeservedly enjoyed a reputation similar to loan sharks, has become an acceptable financing option.

A business owner facing cash flow issues has the option of leveraging the payments owed to him by existing customers and “factoring” these receivables. A factoring agent or company essentially takes possession of the existing invoices and advances the business owner a large percentage of the funds due, typically 75-85%. When all of the invoices are collected, the balance is provided by the factoring company with a small percentage withheld for handling the transaction.

Now, that is all well and good for a company with clients or customers that are making regular purchases in significant amounts. But what about a restaurant owner or a smaller retailer who receives a portion of their revenue from customers in cash and the balance via proceeds from credit card transactions? They do not have a folder full of invoices representing significant anticipated revenues that they can offer a factoring company in exchange for a cash advance. All they have is a drawer full of credit card receipts that are in the system being processed by the bank.

While the circumstances surrounding credit card factoring are different than typical receivables factoring transactions, the principle is the same. Factoring works because the business already has declared the sale as an asset by issuing an invoice. The factor can be reasonably confident that this payment due can and will be received. But customers of a restaurant or retailer have already paid their bill. There is no receivable other than the proceeds from the credit card sales. What is there to leverage?

Factoring companies recognize that, while a retail business may not have receivables and invoices to factor per se, they do have a history of credit card sales which can be a fairly good indicator of sales that will likely transpire in the future. A factoring company will examine the history of credit card payments for a particular business and can agree to advance cash to the business based on this history and the anticipated sales yet to come. However, instead of acquiring the invoices or receivables and collecting their reimbursements from the payment of these invoices, the factoring agent receives a portion of the future, ongoing receipts from credit card transactions.

So, contrary to the standard receivables factoring formula of providing a cash advance on sales already made, credit card factoring provides a cash advance on sales that are likely to be made.

Still, the benefits of credit card factoring are numerous.

• The business does not have to go through a rigorous loan application process.
• Personal credit scores are normally not a consideration. Cash is received much more quickly than a regular bank loan.
• Repayment occurs over a relatively brief period of time resulting in a short-term financing arrangement.
• Cash becomes readily available allowing the business to meet immediate obligations like payroll and rent.

Receivables factoring is a financing option that makes sense for many businesses during these difficult times. Credit card factoring allows business like restaurants and smaller retailers to realize the same advantages.

About the Author

Terry McDermott is an entrepreneur, online marketer and financial blogger. He operates a website dedicated to providing information and resources related to credit card factoring and other types of receivables financing at http://www.FactoringForce.com

Article Directory Source: http://www.articlerich.com/profile/J--Terrence-McDermott/40101

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