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.
- The Advance – The client usually receives up to 75%-85% of face value of the invoice when the invoice is purchased.
- The Reserve – The money on paper that remains in the account waiting for the check to come in.
- Discount Fee – The percentage rate charged for getting the money early.
- 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 email@example.com or fax 636 787 0543.