Factoring Invoices Considered A Debt-free Line Of Credit
Factoring invoices is the conversion of assets into cash
. A factoring company advances cash almost immediately upon receipt of the submission of an invoice. The balance sheet reflects liquidity on the balance sheet.
A factoring company advances approximately eighty-percent of the face amount of each eligible invoice. The advance is made by a third party after a company has been approved for factoring. Eligibility is determined not by the credit history of the beneficiary but rather the company with whom the benefiting company invoices.The beneficary's client is the one ultimately responsible for paying the invoice.
Even though most factoring companies advance about eighty-percent of the amount of the invoice, the actual amount is determined by underwriters who are assessing the amount of risk of that particular industry. Most factoring companies specialize in a specific type of industry.
One of the reasons for factoring is to have enough financing available to sustain company growth. One of the benefits of factoring is the amount available grows automatically as the number and dollar amount of invoices increase. When a business increases from $100,000 to $150,000, the amount advanced would increase from $80,000 to $120,000. Once an invoice has been paid in full by the client, the reserve amount minus the discount fee is paid to the business.
Not only does factoring function as a line of credit, it is also debt-free. Factoring invoices is not a loan but rather the sale of an asset. Therefore, rather than being entered on the balance sheet as a debt, it is entered as cash. Thus, it shows more liquidity on the balance sheet.
The purpose of factoring is to provide funds for companies that are not in a financial position to qualify for conventional financing. Conversely, once a company is able to qualify for bank loans, it should transition to conventional financing to decrease the cost of financing.
Just as merchants accepting credit cards for payment get paid almost immediately after the submission of credit card invoices, factoring also provides a business doing business to business or business to the government also receive payments almost immediately after the invoices have been submitted.
It is imperative for a company to have a handle on its cash flow. The reason most companies fail is because of a lack of financing. By definition, cash flow problems are a lack of adequate financing. Operating on a shoe string so to speak is not the most efficient way to operate.
One should consider the cost of factoring as a cost of doing business. It is said that half of an advertising budget is wasted unless careful records are kept to determine how clients are finding the business. But the cost of advertising is part of the cost of doing business.
Factoring invoices is more reliable than depending early-pay incentive offered to customers. Many companies improve their cash flow by offering two or three percent if their customers pay within ten days from the date of invoice. Factoring offers a way of discontinuing the practice and offsetting the cost of factoring.
One the other hand, offsetting the cost of factoring can occur when the beneficiary of factoring uses immediate cash to pay suppliers who offer early-pay incentives.
Leasing is another way of increasing cash flow. Rather than buying equipment, leasing allows a small amount of outlay. There are two options offered by leasing. The first option is to own the equipment outright upon termination of the lease. The other is to return the equipment.
The first option allows the company to own the equipment at the end of the lease. The second option is sometimes more advantageous for a company to keep equipment updated. Usually, the lease payment will be lower if the equipment will be returned at the end of the lease. Companies should also consider tax benefits from leasing.
Companies offeingr products can also factor purchase orders. It is more difficult to qualify for purchase order financing but possible particularly if a relationship has been developed between a business and factoring company. Usually, that relationship and trust is developed through factoring invoices first in order to prove the integrity of the company and its officers.
If there is any question about whether alternative financing would help your business, contact a reputable broker who can find the right fit for the kind of business you have. The process of applying for factoring is simple. You will usually get an answer and subsequent proposal within a couple of days from when the application has been submitted. Viability of your company is determined mainly from an current aging accounts receivable report and accounts payable report.
Once the paper work has been submitted, funding can be expected within about ten days. All of the eligible outstanding invoices can be included on the intial funding. Thereafter, only new invoices can be factored. Call a broker today!
by: Russell Wardle
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