Factoring Made Simple

Table of Contents

• What is factoring and how does it work?
• How is factoring different from a loan?
• How can factoring help with lumpy cash flow?
• Why don’t more businesses use factoring?
• How do factoring companies address client concerns?
• Frequently Asked Questions

How Factoring Helps Businesses Maintain Healthy Cash Flow

In the world of business finance, maintaining consistent cash flow can make or break a company. Many business owners find themselves waiting 30, 60, or even 90 days for client payments — all while trying to cover payroll, buy equipment, or start new projects. That’s where factoring comes in. In this episode, Gavin Fisher, Founder and President of Rams Head, breaks down how invoice factoring works, why it’s not a loan, and how it helps companies stabilize “lumpy” cash flows. If you’ve ever wondered how to access your earned money faster without taking on new debt, this discussion is for you.

What is factoring and how does it work?

Speaker 1:
All right, let’s talk factoring. Just tell me a little bit about factoring services and what you provide.

Speaker 2:
Okay. So factoring is a different line of credit, so to speak. We can call it a factoring line of credit or invoice factoring — that’s what you often hear about in our industry of finance and lending.

Factoring, in its simplest form, is when you have an invoice you’ve given to a client — say they owe you $100,000 — but you need money today, and they’re going to pay in 60 days. So you come to me, and I say, “Hey, I’ll buy that invoice for $90,000.” I’ll write you a check today for $90,000, and now I own that invoice.

Between you and me, we’ll contact your client and say, “Hey, client, you’re going to pay Gavin back that $100,000.” So in 60 days, instead of writing you the check, they’ll write me the check. It can still be made out to you and directly deposited into our account so we can match it back to you.

When that $100,000 comes in to me, I’ve already given you $90,000. I’ll take out another small fee for processing and handling — let’s say I give you another $7,000, and I keep a $3,000 fee on a $100,000 transaction. But you were able to get your money 60 days in advance to use for payroll, buy new equipment, or start a new project. You had that money right away, and you just paid a small fee to do it.

How is factoring different from a loan?

The good news is, a lot of clients continue to factor because once an invoice is produced, we can buy it and own it — that’s the whole idea. Factoring is not a loan. A lot of people think it is, but it’s not, because I’ve actually purchased something from you, and now I own it. Technically, you still have to pay us back, but it’s not a true loan in the traditional sense, because your client is responsible for paying the invoice.

How can factoring help with lumpy cash flow?

We have a client currently that’s very interesting. They’re a larger firm working with Fortune 500 companies on a contract basis. You can’t lend on the contract per se, but we can factor for them. Their cash flow is very lumpy because their contracts are three years long but renew annually. For example, it could be a $500,000 contract split into three different payments.

They’ll invoice, we’ll buy it now, give them the cash immediately, and they’ll get paid hopefully within 90 days. Then they can invoice for the next year, and we’ll repeat the process. We’ve helped them smooth out those lumpy cash flows. Sometimes, they have no revenue coming in, but by invoicing earlier and receiving money upfront, they can spread their cash flow evenly over 12 months instead of waiting for renewals.

So it’s really nice. It’s a unique product that many business owners don’t know much about. At Rams Head, we like to educate entrepreneurs and business owners, showing them that this product might actually be better suited for their needs than traditional financing. Once they understand it, factoring becomes a popular option — it improves cash flow and makes clients very happy.

Why don’t more businesses use factoring?

Speaker 1:
So why aren’t more businesses using it? It just sounds so simple to me. What’s holding them back?

Speaker 2:
Great question — actually, that’s a fantastic question. The reason is, when I mentioned that your client can pay me directly, a lot of people get caught off guard by that. There’s nothing malicious about it. It’s no different than if you had a car and I bought that car from you, and then someone else paid me for that car later.

That’s exactly what we do — same concept, except this time, I’m buying your invoice. You’ve completed the work, and now your client pays me because I own the invoice, but I still give you your rebate. A lot of folks get hung up on the fact that their money isn’t going directly back to them.

But, like I said, it still is — it just comes to my bank for processing. My bank knows I can collect on your behalf because of how the accounts are set up. We let your client know, “Hey, when you pay this invoice, it’ll go to this address.” Your invoice still has your company name and details — you can even include our bank account information for processing.

There’s really no direct contact that needs to happen between me and your client. You simply list the payment details, and your client pays normally. The only hang-up most people have is understanding where the check goes — and once that’s explained, it makes perfect sense.

How do factoring companies address client concerns?

Speaker 1:
Now, how do you ease that concern?

Speaker 2:
By having that exact conversation and explaining that it’s not malicious and doesn’t harm your business in any way. We’re not going to call your client and say, “Hey, we’re giving them all the money because they can’t afford this without us.” Nothing like that.

We simply help with collection, ensuring checks come in properly, match with invoices, and payments are made on time. If a client is late, we can reach out to remind them — even offer early payment discounts when appropriate. Your client has no idea we’re involved beyond helping you manage payment flow, and that’s what makes factoring such a smooth and effective process.