Have you ever been or do you know of anyone who is in a situation where business is booming, sales are skyrocketing, but there is no money to fill orders, make payroll or cover basic operating expenses?
Maintaining an adequate supply of cash on hand is a constant challenge for most businesses. Sales alone do not measure the cash flow health of a company. While sales may be increasing, you still have to find a way to pay your expenses while waiting for payment for your goods or services.
Accounts receivable funding, also known as factoring, has proven to be a flexible yet powerful method of easily maintaining a steady source of available cash for your business.
What Is Accounts Receivable Funding (Factoring)?
Accounts receivable funding, or factoring, is the sale of accounts receivable invoices at a discount for cash today. Factoring is a huge industry that has been around for centuries. The garment and freight industries have grown into the huge successes that they are today through the use of factoring. Today factors provide over two hundred billion dollars worth of financing to American industry each year. Until the past decade this source of debt-free and equity-free working capital has only been available to huge corporations. Recently, factoring has grown rapidly in popularity among small to medium sized businesses as a proven method of offering fast and flexible financing.
Businesses must have cash in order to survive and grow. Any business, large or small, new or well established can benefit from this service. Financially troubled companies or businesses experiencing a growth phase needing available cash can also benefit from factoring. Many companies go under because they don’t have the funds to meet basic everyday operating expenses. By selling accounts receivables, no debt is generated. Instead, the financial strength of the business is improved by obtaining immediate cash.
Why Should I Sell My Invoices?
When a business sells a product or service to a customer, that business provides an invoice listing the product or service sold and the amount the customer has agreed to pay. Typically, invoices are paid over the course of 15, 30, 60, days. The receivable, or invoice, has real value. Consider how much money can be tied up in as little as 30 or 60 days worth of invoices, and how that same money could be used to better your business if it were available cash on hand. Some businesses offer discount terms to encourage companies to pay quickly. If you offer this option, you are already discounting, only without the added benefits a factor can offer. It is important to take advantage of the value of today’s dollar.
Cash today is worth more than cash tomorrow.
What Type Of Business Qualifies For Factoring?
Any business that provides a product or service to another credit-worthy business and bills with a verifiable invoice will qualify. The size of the business is not an issue.
How Do I Locate A Factor?
As different funding sources have their own criteria as to the type of invoices they accept, a Certified Cash Flow Consultant is utilized to introduce clients to appropriate factors (also known as funders). The Cash Flow Consultant will request completion of a brief Client Profile, and then locate and introduce the client to an appropriate factor.
When Do I Receive My Money?
Initial funding can take place in 5-7 business days. Subsequent funding can take place 24-48 hours after invoice verification. On average, the funder advances approximately 80% or more of the invoice amount by wire transfer directly to the client’s bank account. When the customer pays the invoice in full, the funder then pays the client the balance due minus a nominal fee.
Why Not Just Apply For A Bank Loan?
Obtaining a bank loan is only acquiring more debt. Banks require lengthy application forms as well as requiring years worth of financial records in order to even consider a loan. In contrast, factoring is not a loan, and there is no additional debt or interest incurred. This is a way to increase available cash on hand without creating any obligation to pay. As there is no debt generated, there is no debt to repay. Having fewer receivables due strengthens a businesses financial status. The available cash allows businesses to increase profits with greater sales volume. The application process is simple. In fact, factors welcome clients that banks turn away. While banks are looking at a company’s profits and whether a business is stable enough to repay a loan, factors focus on the ability of the businesses’ customers to pay. Factoring can be used as an invaluable tool for a reorganization plan for any business that has filed Chapter 11 bankruptcy. Bankruptcy courts recognize funding as one of the very few industries offering financing to bankrupt companies. Through the use of factoring, a businesses’ financial position is actually strengthened.
How Can I Increase My Profits?
A steady source of working capital will allow you the ability to:
- Distribute payroll in a timely manner; maintain adequate staff.
- Pay vendors on time and take advantage of vendor discounts.
- Expand advertising to generate more business.
- Fill orders faster, increasing production and sales.
- Replenish inventory quickly to increase production.
With available cash, you may qualify for early payment or large quantity discounts from your suppliers. If your supplier offers you early payment or cash discounts, and you also receive a discount for making a large volume purchase, these discounts will significantly reduce, if not cover, the cost of factoring.
When you aren’t strapped for cash, you are in a better position to offer extended credit terms to your customers without impacting your daily cash flow. Your business will grow by making it easier for your customers to purchase your product or services.
Advantages To Factoring:
The factor will save you a lot of time and expense by collecting and processing your invoices. Many factors will even assume responsibility for your company’s entire accounts receivable department if needed.
Factoring gives you the opportunity to eliminate bad debt. The factor will run a credit check on your present as well as future customers to determine risk. Factors report credit histories to credit agencies, therefore, customers often pay factors more quickly.
What Are The Fees?
Fees are based on risk and how long it takes to receive payment. If your credit-worthy customers routinely send payment within 30-60 days, your funding fee may be less than many companies offer as cash discounts to their customers. The monthly volume of receivables to be funded, the size of individual invoices, and the length of time it takes your customers to pay are considered when determining fees. Large volumes of monthly invoices from credit-worthy customers will demand the best rates. There is no set amount that a factor charges in fees or a set advanced amount as each client’s particular situation is considered. Clients are always given a firm quote on the rate prior to committing to any factoring service.
Factors Are Not Collection Agencies:
Factors should not be confused with collection agencies. When a business decides to factor, invoices should be submitted on businesses that are the most likely to pay in a dependable manner. The longer is takes to collect on an invoice, the higher the fee. The factor makes money on fees generated as the client makes money by increased business. The client is able to increase business due to availability of working capital. Noncollectable invoices will only slow the process down, harming the businesses cash flow while increasing fees. The best customers to factor are credit-worthy businesses that regularly pay their invoices within 15 to 60 days. The more stable and dependable a customer is, the better rate the factor can offer.
Submit All Or Just A Few Of Your Invoices For Funding:
There is no limit to the amount of financing that you can obtain. You are in control of the amount of invoices that you choose to submit for funding. You may fund all or just a few of your accounts receivable invoices. There are no limits. Factoring can be used as a short-term fix or as a long-term solution to increase business growth and profit.
A Steady Source Of Working Capital:
Accounts receivable funding may be your key to creating a solid dependable cash flow while giving you the opportunity to expand your business without accumulating debt. Many profitable businesses consider factoring invoices a standard way of doing business, as increased profit is the bottom line.
Art Fried is a Certified Cash Flow Consultant and President of Get Funded Today, Inc. His specialty is to assist businesses with increasing their daily supply of available cash without accumulating debt. He can be reached by phone at 1.800.480.4007; or e-mail, PlugIntoCash123@gmail.com. Visit www.PlugIntoCash.com.