subject: Does 30-day Interest Free Invoicing Credit Put A Wrinkle In Your Cash Flow? [print this page] Do you have a seasonal business with start up costs and surges in business dollar volume? Do you have difficulty meeting the requirements payment terms offered by your suppliers? Do you have problems meeting the payroll due to extending interest free credit terms for 30 days?
Quite often, net 30 turns into net 45-60 days thus causing the company to have insufficient cash to operate efficiently. The company is required to make payroll and other payments within 30 days but is unable to meet obligations because of accounts receivable that have gone past 30 days.
This is particularly of interest to businesses that have two or three cycles in a year with an increase of orders. Cash flow is a very common problem with a business that is seasonal. Not only does the business have start up costs but larger orders during the peak season.
There is a lot of flexibility in factoring. A business that qualifies for factoring has a credit line that will grow with the business without a need for an additional application for a larger line of credit to meet pay for additional supplies, orders or employees.
The process can continue indefinitely and for an infinite amount of funds unless the face amount of the total of invoices reaches the aggregate that a particular factor will finance.
In most cases, a company can decide which invoices to be factored. Delayed submission of invoices can save a company money on the amount paid for the discount. If the financial officer determines that it would be cost effective without putting too much pressure on the company's cash flow, a delayed submission of invoices is possible and would save the business on the amount of discount paid to the factor. For example, if the company is able to carry an account for 30 days before submission of the invoice to the factor, the company saves the discount that would be charged on the first 30 days. Thus, if the invoice was paid in 45 days, the company would only be charged a discount on factoring for 15 days.
Since factoring is more expensive than commercial loans it should be considered a transitional means of building credit and increasing business so the company can eventually get into a position to be able to borrow less expensive money from a bank.
Some businesses offer 2-10-net-30 as an incentive for the customer to pay before the invoice is actually due. The reason for early pay discounts is to improve cash flow. However, if there are not enough early pay customers to improve the cash flow adequately, it makes more sense to drop the early pay incentive and factor the invoices instead.
When a company offers an early incentive, it is difficult to predict how many customers are going to take advantage of the incentive particularly during a downturn in the economy. Factoring is more predictable. Furthermore, fewer customers will be likely to take advantage of early pay incentives at times when there is a downturn in the economy. Conversely, if the business can find suppliers who offer 2-10-net-30, the business can offset some of the cost of factoring by taking advantage of early pay incentives.
The factoring company advances an average of 70-90% of the invoice in the first installment. The reserve minus the discount fee is sent upon receipt of the payment of the invoice. Once the invoice has been paid, the reserve minus the discount is sent to the business. Factoring is not a loan but rather the sale of an asset. It is a way of helping a company convert accounts receivable into cash. It improves the balance sheet by showing up as cash rather than accounts receivable.
When a business accepts payments from a credit card company for products and services rendered, the business receives one installment minus the discount whereas there are two installments minus the discount in the case of factoring invoices. However, factoring is the sale of an asset rather than a loan.Thus, it does not adversely effect the balance sheet.
