Burden of Cash Flow Problems Lighened by Factoring Inovices
Using credit card to purchase materials for business is not a bad idea as long as the business is able to pay the balance off every month. However, many businesses financing purchases on credit cards end up paying high rates of interest on the cards.
There are alternative ways to finance a business when it is not able to qualify for bank credit. One way to finance the way out of negative cash flow is to factor business invoices.
In essence, when a business offers net-30 day terms on invoices, the company is offering a 30-day interest-free loan. Furthermore, if the invoice isn’t paid within 30 days, often the business does not charge interest for an extension to that interest-free loan. The problem with that scenario is that it causes cash flow problems for the company.
Retail businesses are able to accept credit cards. The process involves the basic principles of factoring. The credit card company pays the business almost immediately upon submission of the invoice but charges the business a discount fee.
Factoring works much the same way except a reserve of approximately 20 percent is held until their client pays the invoice. A discount fee is paid also for factoring invoices. The discount fee is determined by the amount of risk as well as volume. Factoring is also available for purchase orders. It is a little more difficult to qualify and applies only to products and not services.
Factoring invoices involves only business to business or business to government invoices.
Factoring is not entered on the business balance sheet as a debt. It is the sale of an asset. It actually improves the balance sheet as it is a conversion of invoices into immediate cash.
The application process is quite simple. The factoring company needs to have a current aging accounts receivable, an application and accounts payable as well as a copy of each type of invoice used. Other documents may also be required but the factoring company will accept or reject within a couple of business days.
A company doesn’t have to have perfect credit. It is most important, however, that its clients will be able to pay their invoices to the company. Even if a business has less than perfect credit, as long as there is a positive outlook for the company to grow and flourish and as long as their clients are creditworthy, the factoring company can finance the invoices.
Early-pay discounts are an incentive for companies to pay more quickly. If a company is doing so to increase cash flow, it might very well be a consideration to look into factoring and to discontinue the early-pay incentive. It is one way to offset the cost of factoring. In most cases, factoring would be more predictable than offering early-pay discounts.
Conversely, if the company is doing business with other companies that offer early-pay discounts, that also might be a way of offsetting the cost of factoring invoices.
When a company is growing quickly and short of cash, it is a stereotypical comapny that qualifies for invoice financing. Factoring allows that company to grow until the company is able to qualify for conventional financing. Several Fortune-500 Companies have used factoring as a way to temporarily finance their cash flow.
Most factoring companies have a specialty. Manufacturers, distributors, medical receivables an others are considered for factoring invoices. Some will finance construction. Usually the advance is smaller for construction receivable due to risk involved in the construction industry. However, it is important to find a reputable broker to match the right factor and business.
If you have a growing company showing promising growth but need a boost until you are able to qualify for conventional financing, you should look into the possibility of managing your cash flow with a boost from factoring invoices.
What do you have to lose by making application? It may be a way to most effectively grow your business.
For more information about factoring invoices, contact Russell Wardle at corporatecapitalsource.com or call phone 801.676.0579. Also can be reached at corpcap@comcast.net