subject: Turning From Conventional Financing To Factoring [print this page] Would it be of benefit to your company to be able to financing that would not adversely affect your balance sheet? Would you be interested debt-free financing? Is your business not able to qualify for a bank loan?
Factoring is a process where a third party advances about eighty-percent of the face amount of an invoice followed by the balance minus a discount when the invoice has been paid in full. The process of accepting credit cards is similar except factoring involved two installments instead of one. It also involves only business to business or business to government invoices.
The reason factoring is debt-free is because a factoring company only requires being in a first collateral position on the accounts receivable. Factors are not interested in any other collateral. Therefore, there is no need to tie up other business assets. It is not listed on the balance sheet as a debt. Factoring is the conversion of an asset to cash.
The amount of funds available through factoring grows automatically as the number and amount of invoices increase. So there is no need to apply for additional funding or a larger line of credit. It acts as a growing line of credit and allows the company to fill larger orders and grow the business.
Flexibility is another benefit of factoring. When it is most effective, it is possible to delay the submission of invoices. A company can also decide what invoices to factor. Not all of the invoices have to be factored. However, the more volume, the less the cost of the discount fee.
It is most important when deciding whether to factor to know the time-value of money. Money today is worth more than money in the future. One must have a handle on the cash flow status of the company. This also is necessary in order to benefit to the greatest degree by know what and when to factor invoices.
A common practice companies employ in order to improve cash flow is to offer early-pay incentives. It is quite typical for a company to offer a two or three percent discount if the invoice is paid within ten days of the date of invoice. When factoring, the company is able to discontinue the practice and thus offsetting some of the cost of factoring. Conversely, with immediate funds available from factoring advances, the business is able to take advantage of early-pay incentive offered by its suppliers.
There are always certain costs involved with doing business. Part of the concept of accepting credit cards is to do more business even though the cost of the discount is an added cost. But it is worth the extra cost because of the convenience for the customers and the business. Likewise, the cost of factoring invoices is a part of the cost necessary in doing business. Savvy businessmen recognize that acceptance of credit cards and/or factoring have to be figured into the cost of doing business.
The application process is easy compared to applying for conventional bank loans. Most of what is needed in order to apply is filling out an application, submitting a current aging accounts receivable report, accounts payable report and a sample copy of an invoice. Most factoring companies specialize so it is wise to use a broker who can match your industry with the factoring company that deals with your specific industry.
Once a relationship has been developed between a business and factoring company, it is possible to also factor purchase orders. It is a little more expensive because of the risk involved but can be very beneficial to small or medium size businesses that are taking large orders for products.
Most factoring companies don't charge for the application process except when it involves third party medical factoring. If you have a company that is not able to qualify for a conventional business loan from a bank, and the company is growing, one has nothing to lose by applying for factoring.
All of the eligible outstanding invoices can be financed on the initial funding. It takes about ten business days after the necessary paper work has been submitted. After the initial funding, only new invoices can funded.
If your company needs a financial solution, consider calling a broker today to find out if your company would qualify for this alternative type of funding. What do you have to lose?
