subject: Business To Business And Immediate Funding From Invoices [print this page] Factoring involves receiving between seventy to ninety-percent immediate cash advance depending on the industry. When the business client pays the invoice, the reserve amount amounting to the other ten to thirty-percent minus a discount fee is paid for business to business or business to government invoices.
Factoring does not adversely affect the balance sheet. In fact, it improves the balance sheet as it is a conversion of assets to cash thus showing more solubility. Immediate cash from factored invoices can be used for whatever the business considers its highest priorities. It can be used for payroll, accounts payable, periodic payments etc.
Often a bank will subordinate to a factor when a business has an existing loan and factors invoices. However, the factoring company is only interested in a first collateral position on the accounts receivable. No other assets are tied up as collateral.
Money received from factored invoices can also be used to buy in volume and/or received early-pay incentives for paying for materials when suppliers offer a discount for paying before it is due and payable. It is a way of offsetting the cost of factoring.
Factoring companies are not in the business of collection of bad accounts. Thus, when there is a problem with late payment, the company benefiting from factoring invoices is the first contact source with their client. It is in the best interest of everyone involved for the business to maintain a positive relationship with its clients.
Some of the benefits companies receive from accepting credit cards are business from consumers or other businesses that they would otherwise not receive. The business receives funds almost immediately after the invoice has been submitted. A small discount fee is deducted from the reserve after the invoice has been paid.
There are similar benefits received from factoring. One of the main difference is factoring involves two installments instead of one. The discount is deducted from the final installment. Cash flow management is important due to the fact the most common reasons businesses go out of business is because of the lack of ability to finance the business.
It is beneficial to a company to pay a discount fee even though it adds cost to their products. One has to understand the time-value of money. Money in the hand is worth more than future income when a business has a negative cash flow. Positive cash flow for any company must be a high priority.
Some companies offer an early-pay discount to improve cash flow. When a company factors, it can discontinue the discount and offset some of the cost of factoring. If the company is offering a discount and not taking advantage of the discount offered by its suppliers, there are two ways the company can offset the cost of factoring.
Ultimately, the business should use factoring only until being able to qualify for adequate conventional financing. Factoring should be considered time-sensitive and transitional. Conventional financing is most commonly less expensive than factoring.
If your company is unable to qualify for the amount of conventional financing it needs, has business to business or business to government accounts receivable and has a need to improve its cash flow, factoring might be a viable alternative. A business should find a reputable broker to match the company with the right factoring company. Factors stay within a comfort zone by financing only industries they are most familiar with and understand. For example, many will not factor construction whereas other specialize in construction. Some will only factor third-party medical. Yet others specialize in manufacturing.
The application process is relatively quick and simple. Once an application, accounts payable and aging accounts receivable have been submitted to a factor for approval, an approval and subsequent proposal will return within a couple of days if the company qualifies. After a business has been approved for factoring, it takes about ten business days after other paper work has been submitted in order to receive the initial funding. Thereafter, the company receives advances on new invoices within twenty-four to thirty-six hours from submission of the invoice. Find a factoring broker and solve your cash flow problems. What do you have to lose by applying?
