Article: Factoring Provides Alternative Source of Working Capital
Whether you are a machinist operating out of a garage or a
company placing hundreds of workers in the largest firms, you undoubtedly
face cash flow dilemmas from time to time. The uncomfortable ritual of making
incoming cash receipts stretch to cover short term obligations frustrates
even the most seasoned business managers.
In recent years, an increasing number of businesses have
factoring accounts receivable can combat the ups and downs of unpredictable
cash flow cycles. More importantly, invoice factoring companiess are providing the small business
community with a viable source of working capital when conventional
business financing is not always an option.
Historically, the bulk of account receivable factoring was predominately in the
furniture and apparel industries. Today, factoring firms are working
with all types of industries, including: manufacturers, service providers,
transportation companies and high technology firms. Nationally, as growing firms
continue to prosper, suppliers and contractors are looking
for additional sources of working capital to accommodate increased sales volume.
The overall increase in invoice factoring volume is mainly
to the credit crunch in the late 80s. As the availability of bank
commercial credit tightens, more businesses look towards alternative
sources of financing to achieve growth.
Factoring companies can help those firms that banks often find difficult
to approve such as start-up companies whose growth outstrips cash.
The primary focus in a receivables factoring relationship is the credit-worthiness
of the customers being invoiced and the client’s ability to produce a
quality product or service. Simply put, if the business has an
acceptable product or service that it provides to a creditworthy
customer then the business is a candidate for invoice factoring.
The fact is that most companies share a common dilemma
periods of rapid growth of incoming orders draining cash flow.
Factoring financing not only provides immediate cash but, efficient
businesses also use it as a tool to increase profit margins:
1. Take Advantage of
Early Payment Discounts - Having access
cash enables businesses to save on average 2% by taking advantage
of early payment terms offered by suppliers. The points saved by
reducing raw materials costs helps to offset the financial factoring fee.
2. Take Advantage of
Volume Discounts - Having cash also
enables businesses to buy raw materials in greater volume.
This saves money and directly impacts the bottom line.
3. Reduce Late
Payment Penalties and Interest Charges - Having
immediate cash on hand to pay current obligations as they become
due eliminates late charges from suppliers and other creditors.
4. Meet Obligations
on Time - Paying vendors on time helps
to establish a solid credit track record and allows for
increased future credit limits from vendors as well as financial institutions.
5. Offer Invoice Credit
Terms to Customers - Offering credit terms
to customers is a common way to increase sales by making it “easier”
for customers to buy. Having financial backing to carry accounts receivable
is essential if a business wants to be able to follow through on its commitments.
Reputable account receivable factoring companies encourage “managed” growth
by consulting with clients regarding exposures and other
risks when taking on new credit accounts.
The difference between invoice factoring and other sources of
that the factoring company actually purchases and tracks commercial invoices.
In addition to providing immediate cash on invoices, the factoring company
performs valuable credit analysis on new and existing customers
and conducts professional, routine follow up on invoices as they become due.
For the business manager who spends a good portion of the day
bookkeeping and searching for capital, the entire factoring package
offers peace of mind. The manager can actually focus on important
aspects of the business that are often pushed aside,
such as marketing and production.
Depending on the agreement, businesses can pick and choose
which invoices they wish to sell to the invoice factoring company, who immediately
advances eighty percent or more of the face value of the invoices.
The balance of the funds, less the discount fee,
is released once the invoice is collected.
The cost of doing business with a factoring company is the
taken on the invoices submitted for funding. Fees range from 1 to 3percent,
depending on volume, credit-worthiness of the customers sold and overall risk.
The discount taken is best compared to a merchant accepting
a Visa or MasterCard transaction and receiving immediate payment,
less a percentage or discount, before the actual cardholder
has paid his or her monthly statement.
Setting up a factoring relationship is quick and easy in
to other forms of financing. Applications simply call for basic company
information and a customer list. Years of profitability are not required
which makes factoring an option for startups generating receivables. It is possible
that funding can occur in as little as a couple of days after the receipt
of the application and invoices.
Each factoring company operates slightly different. It is important to understand which
programs provide the greatest benefits and at the least cost. Several
criteria should be addressed when searching for a reputable factor.
Are there setup fees, maintenance fees or penalty fees?
Is there a long term contract? Are there monthly minimums?
Does the factor provide credit and collection services at
no additional charge? What accounting reports will the factor supply?
What value-added services does it provide?
Most business bankers are a good referral source for
factoring companies. Bankers refer to factoring companies because they realize
that although the customer may not be bankable at the time of the referral,
in a short time it could be a viable candidate for conventional financing.
As a short term financing solution, factoring relationships
generally run from 6 months to a couple of years.
Businesses choosing to maintain momentum, despite a lack of
financing options, find that invoice factoring not only offers cash but also a
stable foundation on which to build. They look to a future of managed
growth and profitable performance that will bridge the gap to qualifying for bank financing.
Factoring Account Receivables Services
Contact our accounts receivable factoring specialists at:
invoices can offer many benefits to cash-hungry companies.
marketing efforts, and working capital are
invoices provides the means for a manufacturer to
Why Receivable Factoring
Factoring is especially appealing to young and rapidly growing companies. Since the invoice factoring process shortens their business cash flow cycle, these businesses can grow faster. The ability to make more products to sell while waiting for invoices to be paid is largely eliminated. Such businesses usually net much more profit with receivables factoring than without, even when the discount is considered.
Receivable Factoring Company vs. Bank Loans
Factoring has been around for thousands of years. Factoring companies pay cash for the right to receive the future payments on your receivables and invoices. An unpaid accounts receivable or invoice has value. It is a debt your customer has agreed to pay in the near future.
Account Receivable Factoring Frequently Asked Questions
Contact our account receivable factoring specialists at:
We are currently providing account receivable factoring services nationwide including the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho State, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico,
New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.