How To Get Money When Suppliers Change Credit Policies
A downturn in the economy has required banks and loan institutions to tighten their commercial credit
. As a result of the trickle down effect, suppliers also have tightened their financial tolerance to extension of terms from net-30 to net-45 or even net-60. It is necessary for companies to be able to deal more effectively with cash flow issues.
On average, a business extending 30-day terms to another business was extending to an average of about 54 days until the downturn in the economy in 2008. In 2009, the average payment went from 54 days to about 59 days. The purse strings have been tightened by loan institutions. That has caused suppliers to be less tolerant of late payments made on invoices due within 30 days. While this has forced some companies out of business, others have had to be more current on paying invoices in order to maintain a positive relationship with their suppliers.
Suppliers have not had the available cash on hand to be as tolerant to late paying customers except in the case of larger companies having the clout and cash on hand to be able to take advantage of smaller companies. Larger companies have a tendency to take advantage of their good name and reputation knowing that the smaller company will do anything in its power to retain their business. Many large companies have a great reputation for always paying but also always being late on paying invoices. A common metaphor in business unfortunately is that this is where: "He who has the gold rules.It is common for larger chain stores to take advantage of the 30-day invoice cycle when dealing with smaller companies.
In order to reduce risk to banks and loan institutions, credit restrictions have come into play. So companies have had to be more creative about finding alternative financing.
One of the options to a business that does invoicing business to business or business to government is to factor invoices. It is a debt-free way of improving the cash flow without adversely effecting the balance sheet. It is debt-free because it is the sale of an asset rather than a loan. However, one might use it as though it was a debt-free line of credit. Here are some of the advantages of invoice factoring: No periodic payments
Amount available grows automatically as the company grows
No need for application for additional funds
No designation to how the funds are used
Cash within 24-36 hours from submission of invoice
Does not tie up other assets
Credit worthiness based on the credit of clients
Can factor some or all of invoices
Can delay submission of invoices
Factoring is similar to receiving payments from credit card companies. Most credit card purchases are submitted electronically to the credit card companies. Within a short time, the company received a payment from the credit card company after the discount has been deducted from the total invoice amount.
It depends on the industry as to what percentage of an invoice is advanced on an invoice. The advance is sent within 24-36 hours. The twenty or thirty-percent reserve minus a discount is paid immediately after the company's client has paid the invoice.(The initial advance for construction is usually 70-75% due to complexity of layers of subcontractors, liens and other nuances having to do with the construction industry.)
There are two main differences:
1. Rather than one installment, there are two installments involved with factoring.
2. Factoring is only for business to business or business to government invoices whereas credit card financing involves business and consumers.
When a company has a loan from a bank or financial institution, it is sometimes necessary to request a subordination of the accounts receivable. A factor always requires being in the first collateral position on accounts receivable. No additional collateral is required by a factor.
Factors can help in managing risk by helping companies determine the credit risk of dealing with specific companies. Frequent and accurate reporting allows a company to continue to know how to manage cash flow. However, the factor allows and encourages the company to maintain contact with the client. If a collection problem occurs, the company rather than the factor will be the one who calls the client.
Factoring should be considered a time sensitive and transitional process to finance until the company is able to qualify for enough conventional money to maintain a positive cash flow. A company must alleviate cash flow problems in order to grow and flourish.
by: Russell Wardle
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