A Factoring Tale

James was in the oil and gas business. He sold equipment to oil and gas companies that need to replace broken or missing parts. One day, another business owner approached James with a fabulous deal, the kind you couldn't pass up.

Sharon had a client who was closing his business because he wanted to retire and take it easy. The client had a large inventory that James could add to his inventory for reselling. The parts were in great shape, almost like new. For James, this would mean taking his company to the next step. He didn't have enough cash on hand to buy the entire inventory. On top of that, he could never find a better deal for all of these parts.

So James searched for a way to get the working capital he needed for the deal. He also had to be able to make payroll and pay his regular expenses. He cursed at the bad timing when cash flow was low. If he didn't move fast, Sharon would go to a competitor as her client was eager to empty his warehouse.

James called his accountant to see if she could find a way to pull together the needed cash to buy the inventory that would take his company to a new level AND be able to handle his monthly expenses without going bankrupt. Even though his business was growing, bankruptcy was a possibility if he pursued the deal.

Phyllis studied the company's books and reports. She brainstormed with James to see if they were missing something. The answer was right in front of them, scattered on James' desk. They were $45,000 worth of unpaid invoices. Outrageous, but a life saver!

Phyllis suggested that James sell the invoices using factoring. She explained that factoring, also called accounts receivable financing, would give him the needed cash faster even though he would not get the invoices' full value. Getting cash now was more important than waiting for the customers to get around to paying their invoices.

Besides, the factor (the organization that buys James' invoices) would assume the risk of the invoices in getting them paid. That'd be another big load off James' plate and he could spend more time growing his business by doing what he did best: managing and selling his inventory. Once he received the cash, his business was back on track and he took more care to ensure his cash flow remained constant.