The Top Ten Questions When Considering Accounts Receivable Factoring

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A business owner is considering Accounts Receivables Factoring to grow his business. Here are his top ten questions. An experienced factor supplies the answers.

What are ten of the most common questions of a business owner considering Accounts Receivable Factoring? An actual business owner has supplied this list of questions.

1. What will my customers say when they find out I am factoring my receivables?

Receivables-based financing is used by many of the largest corporations in the world to improve cash flow, support growth and increase profits. Many of your clients’ customers may use this service themselves and others have become familiar with it through vendors. The fact your company qualifies for this “credit line” makes a strong, positive statement about your company.

2. Will I lose control of my company?

You actually have more control over receivables when factoring than you would have with other traditional financing such as angel or venture capital as most of these funding resources want you to sell your business in the near future or they might want to replace management if they are not comfortable with the way your business is operated. With Accounts Receivable Factoring, factors keep you abreast of the whole payment cycle. You have visual access to your factoring account and can see open or closed invoices. Combined with purchase order funding, accounts receivable factoring provides you with the cash flow you need without having to give up ownership in your business.

3. How is accounts receivable factoring different from accounts receivable factoring from a bank?

The factoring company focuses on the creditworthiness of your customers while banks focus on your company’s financial history and cash flow. Since accounts receivable factoring is not a loan, it does not appear on your company’s balance sheet. Factors can make a quick funding decision while banks may take weeks or months to approve a loan.

4. You are charging 3% discount on thirty days, isn’t that a 36% interest rate?

This is an advance on receivables, not a loan. Therefore, you cannot calculate your cost that way. If you sell $100,000 in receivables per month and pay 3% per month, your cost is 3% of the total invoice amount or $36,000. You have at your disposal $1,200,000 per year. If you give your customers a 2% discount for paying in 10 days are you paying 72% interest? (2% on 10 days is 6% per month over 12 months = 72%). Can you see the error in this logic?

5. What do I need to qualify for accounts receivable factoring?

You need to be invoicing customers and you need a credit worthy customer. We check the credit of your customer, as this will give us an insight as to how your customer will pay. Incidentally, a good thing happens when your customer finds out you are factoring. These customers tend to pay faster. Why? Because factoring companies report payment trends to the credit bureau. And companies know if they don’t pay on time, their credit drops and this impacts the availability of their future credit. Also most factors want their clients to be registered in the state where they are doing business. You can be a new company, an established company in a growth pattern, or a company that cannot get a loan at this time and still can factor.

6. Can I keep my existing bank line of credit or my SBA loan?

Yes. While factors want to be in first position regarding factored receivables, we complement and work in cooperation with your existing lender to enable you to access even larger amounts of cash to keep your company moving forward. Banks are happy if you factor. You keep your money in their bank and we put more money in your account. They keep you as a customer and then when you want or can qualify for a bank loan, they are right there to help you with that transaction.

7. My payroll is next week; will I have my funding in place to pay my employees on time?

Factoring is quick, easy, and efficient. It has little paperwork. As part of the setting up process, you give a notification letter to your customer to let them know you are now working with us. We supply the form letter. You put it on your letterhead and send it to your customer. Invoice verification is an essential and accepted part of factoring. As soon as your customer signs and returns the notification letter to us, you can start receiving your first advance upon verification of the invoice. Usually it takes about 3-5 days to set up the process. Then advances can be made within hours.

8. How often can I factor?

You can factor as often as you need. Many customers factor several invoices per week, some factor once a month. It depends on your business and the industry you are in. There is no contract regarding length of time to factor. Stop when you wish, or continue as needed.

9. What are some of the other advantages companies enjoy when they factor?

A. They can take advantage of future sales and can execute on a big emergency or unexpected order.

B. They can use vendor discounts to save money.

C. Their credit score increases because they are now paying their bills on time.

D. They can add the factoring fee to their bid. This fee is written off as a business expense. Therefore they are getting immediate cash with little or no debt.

E. They can now focus “on” their company instead of “in” their company and can plan growth more efficiently.

10. What happens if my customer does not pay you?

There are usually two reasons why the customer doesn’t pay. A customer goes bankrupt or insolvent or there is something wrong with the product or service. Factors tell you if their due diligence shows your customer is not financially stable. This is another advantage of factoring. Secondly, factors will not be responsible for anything with the product or service. In any case, we can either take back an exchange invoice to collateralize the advance or we can charge the non-paid invoice back to you through a payment from your reserves.

Conclusion:

Accounts receivable factoring is a great choice for companies, especially those who cannot get traditional funding. While it may cost a little more, many business owners are willing to pay more to have the funding immediately needed to complete present contracts on time and on budget and have funding to go after future business instead of losing business waiting for checks to come in. Factoring is a way of receiving immediate cash with little or no debt and allows the business owner to have the peace of mind and time to work on their business without worrying about late check payments.

To find out more about accounts receivable factoring and to see if it is a financial fit for your company, contact Lexx Funding, Inc. at 636 458 2612 and ask for Joy Ann or email her at joyann@lexxfunding.com.

Have Something to Sell? The Government Wants to Buy from You

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Small business owners especially women-owned and minority companies should seriously consider selling to government entities. Why? Because the government buys everything. And the government pays.

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Factoring: An Alternate Way of Getting Capital Into Your Business

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When your customers take 30, 60 or 90 days to pay an invoice you are financing their business.

As a factor, I have been involved in the cash flow industry for over 20 years. Any time a business is owed money, the business owner can opt to collect that money sooner rather than later by negotiating to receive a reduced amount from a third party. One of the ways that businesses use to manage their cash flow is by factoring their receivables.

What is Factoring?

Factoring, sometimes known as accounts receivable funding, is the process of purchasing commercial accounts receivables (invoices) from a business at a discount. This process provides businesses with cash today—cash that would normally remain tied up in accounts receivable for several weeks or even months.

Factoring eliminates problems companies face when customers with slow payment habits create uneven cash flow. Although factoring originated with the Greeks and Romans, over 4000 years ago, small to medium sized companies have only recently begun to use it. It has spread to all types of product and service-driven industries. It is becoming the fastest growing financing option of companies today.

When your customers take 30, 60, or 90 days to pay an invoice, you are financing their business. They are using the money actually owed you, to run their operation – money you could be using to pay your employees, purchase new equipment or grow your business in another way.

Factoring allows you to overcome problems created by your slow to pay customers by advancing a percentage of the invoice amount. This way you have money as soon as your service or product has been delivered, not 30 or more days later.

Unlike traditional forms of financing, such as bank loans and venture capital, factors primarily look at the creditworthiness of your customers, not you. In short, factors are more likely to say “yes” when banks and investors say “no.” Therefore, even if you are a start up business, factoring can open previously closed doors to increased profits and growth.

The Factoring Process is fast, easy, and requires minimal paperwork.

The factoring approval process can take less than a week. After the initial funding, your advance funds can be in your company’s bank account in hours. The discount rate, the rate you pay for receiving your money immediately, depends on the invoice amount, your customer’s ability to pay, when your customer will pay, and the industry your customer is in.

Factoring costs more than a bank loan, but when weighed against the cost of lost business or losing your business entirely, the importance of the discount associated with factoring diminishes considerably.

After papers have been signed, the funding process begins. The factor conducts due diligence by researching your customers’ credit and any liens placed against your company. The factor also confirms the legitimacy of your invoice before buying your receivables and advancing money to you.

Let’s define words that a factor uses.

  1. The Advance – The client usually receives up to 75%-85% of face value of the invoice when the invoice is purchased.
  2. The Reserve – The money on paper that remains in the account waiting for the check to come in.
  3. Discount Fee – The percentage rate charged for getting the money early.
  4. Rebate -  The money that is rebated back to the client.  When the factor receives the check, the advance and the discount fee is subtracted and the rest of the check is rebated  back to the client.

Let’s look at an example of a $10,000.00 invoice that is factored with an 80% advance.

This is money to take on new contracts, pay payroll on time, buy supplies at a discount, pay taxes. Is it worth it? It is for most companies.

Who is a candidate for factoring?

The typical business that is a good candidate for factoring is a small to medium sized business that has an established contract to supply a credit-worthy company or government agency with a quality product or service at a price that provides a good gross margin.

This business will be one growing at a fast rate, without having the ability to internally finance its growth, and can likely recoup all or part of the cost of the factor’s fee. This business may be a start up, it may not have collateral, and its owner may not have good credit. This business may have invoices not coming in on time.

Factoring can be used in every kind of industry. Even those businesses working through Chapter 11 bankruptcy can factor. Factoring offers flexibility and unique problem-solving ability. If factoring is not for your company, then the factor can often help direct you to some creative alternatives, such as equipment leasing, government financing, credit card advances and of course, bank loans.

Factoring has many benefits for business owners.

Factoring can improve the efficiency of your business. Factoring provides predictable and continuous  cash flow in order to:

  • Increase Sales
  • On refusa continuar payar custosi traductores
  • Fund growth and expansion
  • Meet payroll and payroll taxes
  • Maintain a good credit rating
  • Capitalize on supplier discounts
  • Obtain cash without debt (fee is written off as a business expense)
  • No long term contact
  • Does not require strong financials
  • Start ups are eligible
  • Ideal for non bankable business
  • Little or no due diligence fee

If you can get bank financing based on your personal and business history, then do it.
If you need financials that are able to grow when your company grows, then you should definitely consider factoring. Call Joy Ann at 636 458 2612 to discuss your financing options.

Joy Ann Venverloh is the owner/CEO of Lexx Funding, Inc., a factoring and financial consulting company. She can be reached atjoyann@lexxfunding.com or fax 636 787 0543.

Six Reasons to Factor Your Invoices

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Many business managers view the “factor” as the lender of last resort, a sort of leverage only to be used when other lenders refuse to extend credit.   Unfortunately, this attitude arises from a lack of knowledge and is an obstacle to the success and full potential of many businesses.  Today, most businesses factor due to the accessibility and liquidity factoring provides as they sell their credit-worthy receivables for needed cash.

In the fifteen years of operating my factoring company I have discovered my clients rank the most important benefit of factoring is the ability to quickly raise cash when their business cannot get a traditional bank loan, or when a company is experiencing rapid growth and needs to purchase materials, pay vendors and cover operating expenses.   I have been amazed at the reaction of my clients when I explain factoring, how it can help them, and how quick they can get their company funded.  The smile just radiates from their faces as they discover all the benefits of factoring. Because it’s a dynamic financial tool that enables them to continue to make sales, accelerate and stabilize cash flow, businesses across the world continue to use this powerful tool.

There are a significant number of reasons why companies should consider factoring.   Here are six.

1.  Factoring is an extremely fast way for companies to raise money.   A factoring deal can be done in only a few days, or even sooner.   A company can have cash in hand in a very short amount of time.   As soon as the invoice is generated and verified, money can be advanced to a business desperate for cash or looking to quickly expand their operations.

Applying for a loan can take a good amount of time, including receiving word back on whether or not a bank is willing to provide the money needed.   A business may not have that amount of time.   The livelihood of its business may depend on getting money fast.

2   Factoring shortens the collection process.   Businesses often wait weeks or even months before they are paid for services rendered or products delivered.   During this time, many are cash poor and don’t have funds available to grow their businesses or even pay for current operational expenses.

If a company has to wait 30, 45, or even 60 days before receiving payment, its outstanding cash is actually funding the customer’s company.  This money is needed to pay payroll on time, replenish inventory, and buy vendor supplies at a discount.   If an invoice is factored, the company gets most of the invoice amount immediately to use however the business owner wants to or needs to use it.

3.  Factoring is funding without liability.   Banks look at the business assets, how long the company has been in business, the company’s credit score, the owner’s credit score, the balance sheet, and the profit and loss statement.   Today companies that could get bank loans a year or two ago cannot get one now mainly because of our unstable economy, and because the loan criteria has changed.   The company has to have a higher credit score and down payment requirements tends to be much higher.

“It is not about you, it is your client’s credit that matters.”

When a company factors they can get immediate cash with debt.  The factor looks to the credit-worthiness of it’s customer’s for its due diligence, and to see if each customer is paying their bills on time.   Therefore a company can be a new company, have little or no collateral, and may not have the best credit score, yet customer invoices can be factored.  In this way, the company receives cash instead of a loan with all the associated liability.

4.  Factoring strengthens the balance sheet.  As a company is factoring its invoices, its bank account is receiving this money.   The company can now pay its employees and creditors on time, and its taxes on time.   Its vendors are eager to sell them their products and give them discounts because now the company can pay them on time.

Factoring helps businesses become more likely to get that bank loan in the near future because now its credit score is higher since bills are being paid.   Employees are happy because they are paid on time and therefore do a better job and the job gets done on time, making the company more profitable.

5.  Factoring gives peace of mind to the business owner.   When factoring invoices, the business owner does not have to worry about when checks are going to come in so bills can be paid.  He has already received most of the invoice money upfront.   He may be able to cut his accounting department’s staff since the factor now keeps track of the invoice and sees it is paid in a timely fashion.

The business owner now has the time to work “on” his business instead of  just “in” his business.   He has the time to plan new projects and develop new products.

“Factoring is a simple and straight forward business process.   It requires little paperwork, time, and little or no collateral such as hard assets or real estate”

6.  Factoring helps seasonal or service companies.   Payroll and payroll taxes fuel the cash flow needs of temporary staffing agencies, cable installers, security guard companies, and corporate consultants.  Because their assets often consist primarily of accounts receivable, which banks typically won’t lend against, obtaining financing can be challenging.

An Accounts Receivable Credit Line where cash is available “on demand” and there is no restriction on use of funds may be used to better manage and expand these businesses.   Funds can be drawn only as much as needed and the business pays for what it uses.   An Accounts receivable Credit Line uses far less collateral, requires only minimal paperwork, can be in place in a week or less, and best of all, grows with the business.

If you have gone the traditional lending route and had no positive results, why not try the alternative funding option of factoring.   Lexx Funding will help you discover if factoring will solve your cash flow problems.  Call Joy Ann now!  636.458.2612