subject: Business And Leveraging Accounts Receivable [print this page] When a company submits invoices with terms of net-30, often the account won't be paid for almost 60 days. This creates cash flow problems for many companies. When the company is growing, it is difficult to keep up with new orders. The line of credit or lack thereof is unable to keep up with and increase in business.
When a company is unable to qualify for conventional bank loans or lines of credit adequate to keep up with their growth, it is time to look at alternative ways to finance their business. For a company doing business to business or business to government, a viable alternative is to factor invoices. Factoring provides an almost immediate advance for up to eighty-percent of the amount of the invoice.
A factoring company is a third party who buys invoice in two installments. The first installment is called an advance. The second installment minus a discount is paid after the business client pays the invoice. The advance allows the company to not have to worry about whether the payment comes soon enough to pay its bills.
A balance sheet is not affected adversely inasmuch as factoring is the sale of an asset rather than a loan. It actually improves the balance sheet by showing more liquidity.
Factoring allows business owners to spend more time and effort on what they do best by providing their products and services. It allows companies to know when to expect payment for goods and services already provided.
One of the advantages of accounts receivable financing is it functions somewhat similarly to a line of credit. However, it does not show on the balance sheet as a debt. Also, the amount of funds available increases as the company grows. No need to apply for additional financing.
Factoring is time-sensitive and transitional. It is generally more expensive than bank loans so the company should ultimately be working toward being able to qualify for adequate conventional financing.
Factoring companies are interested in factoring invoices sent to creditworthy companies. Therefore, the company benefiting from factoring may have a less than desirable credit rating and still benefit from having customers who are creditworthy. The factor is most interested in whether the invoice is going to be paid by the actual debtor.
Factoring should be considered time-sensitive and transitional. Ultimately, the company would want to qualify for less expensive financing. More companies go out of business as a result of a lack of capitalization than for any other reason.
The underwriters of factoring companies look at whether the clients are creditworthy. Factors help companies screen their business clients in order to ensure the payment of invoices. It is also important to be able to determine the viability of the business benefiting from factoring.
Most savvy business people understand the advantages of accepting credit card purchases. The most obvious is increased sales as a result of offering a credit option. Another attractive benefit is the business receives payment minus a discount fee almost immediately after the credit card invoice has been submitted for payment. Furthermore, the credit card company takes the credit risk. When a business finances its own customers, it takes a certain amount of credit risk.
Invoice factoring is similar to accepting credit cards except the business receives payments in two installments. The first installment is an advance of usually about eighty-percent. Once the client pays the invoice, the reserve is paid minus a discount fee. This arrangement allows the business to be able to count on the money being in the account regardless of whether or not its clients pay the invoice on when due.
One must understand the time-value of money. Money in the hand is worth more than more money due in thirty days especially if one needs the money immediately to meet financial obligations. For that reason, it is worth paying the discount fee.
One way companies generate more immediate income is by offering early-pay incentives to pay invoices before they are actually due. By discontinuing this practice, a company is able to offset some of the cost of factoring. Conversely, when a company has the funds as a result of factoring, it can often take advantage of early-pay incentives offered by its suppliers. This also helps to offset the cost of factoring.
When a company is in a growth mode, having cash flow problems, and is unable to qualify for conventional bank loans, it is a perfect scenario for factoring invoices.The company would be well advised to find a reputable broker who can find the right kind of a fit between a factor and the company's industry.
Most factoring companies will accept or reject an application within a couple of days. It doesn't take weeks or months to find out whether the process was an effort in futility. When accepted, a company can expect a subsequent proposal outlining the terms of factoring. At that time, the company can make a decision as to whether factoring would or would not be in the best interest of the company and its finances.
Factors pay new invoices within twenty-four to thirty-six hours after submission of invoices. Initial funding can be expected within about ten days after the paper work has been submitted. All of the eligible outstanding invoices can be funded on the initial funding. Thereafter, only new invoices will be funded.
If you have a company suffering from a lack of cash, why not consider invoice factoring by calling a broker. What do you have to lose?
