A business venture can experience cash shortage or difficulty in being liquid even if it has receivables and steady assets that are more than its payables and other liabilities.
There are easy solutions to cash shortage just so a business enterprise can meet its short term obligations like payroll. Among these solutions include loans or short-term borrowing and factoring accounts. Factoring accounts can be done for accounts that are expected to be received by a company during a certain period.
A person who wants to avail of credit through the factoring of his accounts receivable must submit an application form which will then be reviewed by the agency concerned. Once approved, the applicant should consider the terms of the loan proposal and wait for a maximum of seven days within which the agency will con duct a credit investigation. The investigation will cover the applicant’s credit status, tax payments and liens as well as any pending criminal case.
After which, the applicant must submit the original invoices of services rendered or good s delivered. Once the invoices are verified, a fund amounting to about eight percent of the total invoice will be approved and advanced to the applicant. The balance will be held until the invoices are fully paid.
Payments for services rendered and goods delivered will be sent directly to the credit agency which will in turn release the balance of the total invoice less the appropriate payments for their services.
Getting short term financing through factoring of the accounts receivable of a business enterprise can be easily availed of even through the internet. There are credit agencies that have made the process easier by making forms available online. By filling up the form online the applicant can have his accounts receivable assessed before he speaks to a credit representative.
Companies selling services ad well as distributors selling products are eligible for the factoring of their accounts receivable provided the services have already been rendered and the goods already delivered.
This method of accessing easy funding is commonly used by trucking companies who have thousands of accounts receivables in the form of freight bills. However, these companies have to pay their truckers as well as pay business overheads so they cannot wait for a month or more for these bills to be liquidated.
Factoring is an easier way to get additional funding for business compared to the traditional financing methods which require lots of paperwork and long waiting periods. With a meager amount deducted by credit agencies from the invoices, usually one to six percent, small business can already add to their cash flow and can run their businesses efficiently.
Why Is Factoring Important In Business?
The Business Of Factoring & How It Works
Factoring, also known as accounts receivable factoring, is a business term used to describe a method in which companies sell their outstanding receivable invoices in order to gain immediate cash for their business. When a company sells a product or service, an invoice is created stating the amount due and the number of days in which the invoice must be paid. This invoice instantly becomes a part of accounts receivable, which is money that is owed to a business. After the invoice is generated, it must be sent to the customer and the business must wait for the specified amount of time before that invoice is paid. Often times, for reasons of misfortune or lack of attention, a debt may go unpaid and extend past the due date. This presents a problem for the business, which is awaiting payment, in that it interferes with the cash flow when a debt is not collected. This is especially true of new, or struggling, businesses.
The process of factoring works when an institution purchases the invoice for an amount that is somewhat less than the face value of the debt. This amount can be anywhere between 70-90%. The factoring company then proceeds to collect the full amount due for the invoice, which is then delivered to the original business less a factoring fee.
If a business offers credit terms as part of their sales, factoring is one way of eliminating cash flow problems. Many businesses who use factoring receive their money, from the sale of their invoices, within 24 to 48 hours. This unique approach also offers a company with the ability to extend competitive credit terms to their best customers and not have to worry about waiting for the credit payments. By offering attractive credit terms, more customers will be drawn to a business. Most businesses compete in pricing, but a company is much more appealing if they offer financing options direct to their buyers. Many consumers do not have the funds to pay for items upfront, especially if a business markets more expensive sales, but a customer may be able to agree on delayed payments. Therefore, a business offering such a deal would sell more inventory than a company who requires total payment upfront.
It’s important to realize that factoring is not a loan or a debt. In addition, unlike bank loans, collateral is not required. It’s simply the sale of invoices, on which people owe money, to another business for a slightly smaller percentage than the total due. The original business gets immediate cash and, for a fee, the factoring company collects the face value of the debt.
Many businesses, who extend credit, opt for factoring in order to avoid the hassle of trying to collect money. In addition, it costs more to have a billing department who is responsible for creating invoices every month. By factoring, a business eliminates their need for a billing department and saves money on the hassle of attempting to collect debts.
The cash generated from factoring will allow a business to purchase new equipment, pay existing debts, increase marketing efforts, improve planning, process new credit approvals, improve customer relations and save money on accounting procedures.
Why Is Invoice Factoring Financing Better Than A Business Loan
Are you looking for a business loan? Many business owners who need financing start their financing search by looking for a business loan or a business line of credit. Although business loans and lines of credit are well known products, they are very hard to get. And in reality, few business owners actually manage to get them.
In certain instances, invoice factoring may be a better and easier to obtain alternative. There are three conditions that can determine whether factoring is a better alternative than a business loan:
1. Are your clients’ slow payments hurting you? Do they take up to 60 days to pay?
2. Are you turning away bigger sales because you lack working capital?
3. With the right financing, does your business have significant growth potential?
If you answered yes to these questions, then chances are that factoring your invoices will be better for you than more traditional business financing products. Invoice factoring provides you with financing based on your invoices, eliminating slow payment cycles and providing you with money to pay rent, meet payroll and expand your business.
Since factoring is tied to your sales potential, it does not have the arbitrary use limits that business loans have. The more your business grows, the more financing you qualify for. Period. This makes it an ideal product for businesses that have significant growth potential.
Factoring (or receivable factoring as it is also known) is easy to use. Once you have invoiced your customers you send a copy of the invoice to the factoring company. The factoring company, in turn, advances you up to 90% of your invoice and waits to be paid by your client. Once your client pays the invoice, the transaction is settled.
In effect, by financing your invoices you eliminate the slow payment problem. You accelerate your cash flow, enabling you to pay your obligations, take new opportunities and grow your company.
In terms of cost, factoring is a very competitive product. Factoring fees range from 1.5% to 3% per month, making it an affordable product. If you own a business that is growing and you need financing, be sure to consider invoice factoring.
Can accounts receivable factoring help your business grow?
Are you stuck with great but slow paying clients? It is interesting how your biggest asset (great clients) can also be your biggest liability. But that is how business is. And as an owner you must adapt.
Whether you like it or not, slow paying customers are here to stay. As a rule of thumb, commercial clients pay their bills in 30 to 60 days. And lately, the trend has been deteriorating. So, what do you do if you have slow paying receivables.
Many owners try to go to the bank to get a business loan. Not surprisingly, few business owners get business loans. As a rule, banks will only finance companies that have long and established histories. This is not your case if your company is new or emerging from tough times.
If your biggest challenge is that you cannot afford to wait up to 60 days to get paid by your customers, then the solution is accounts receivable factoring. Most commonly known as factoring, this type of financing eliminates the usual wait to get paid. It provides you with the necessary funds to pay suppliers, meet payroll and take on new business opportunities.
And how does factoring work? Simple:
1. You finish the work and send an invoice to your client. You also send a copy to the accounts receivable factoring company.
2. The financing company advances you 70% to 90% of the invoice (a small reserve is held to handle disputes, etc.)
3. You get the funds in 24 hours
4. As soon the customer pays the invoice to the financing company, they rebate the reserve (less a small fee)
As you can see, accounts receivable factoring can easily be integrated into your business, providing you with prompt invoice payments. Usually, funds are advanced within 24 hours of submitting invoices.
Accounts receivable factoring is easy to qualify for. Accounts can be set up in as little as 4 business days. As opposed to business loans, the main requirement for factoring is to do business with strong credit worthy customers. So if you do business with good commercial clients (or the government), be sure to add factoring to your business tool chest.
Can a factoring company help you grow your business?
Sooner or later, every business will need financing to grow. Most owners will try to qualify for venture capital or angel financing. Others will try to get a business loan or line of credit, since business loans are popular with business owners.
All these business financing tools work well, but they also have a very important trait in common. They are hard to get and out of reach for most owners.
There is an alternative way of financing your business growth. Financing that is easy to qualify for, quick to set up and very cost effective. Not only that, it’s financing that grows with your business. And most of the time, you won’t get it from your local bank. This form of financing is called invoice factoring and you can get it from a factoring company.
Factoring is different than a bank loan and it works well if your biggest problem is that you can’t wait the 30 to 60 days that commercial clients take to pay their invoices. Basically, invoice factoring cuts the payment time to two days.
Factoring is simple. The factoring company buys your invoices (at a small discount) and pays you for them immediately. Then, the factoring company waits to get paid by your client. The net result: you get immediate working capital to pay business expenses and grow. You also eliminate the stress of having to wait to get paid and can count on a predictable cash flow.
As a form of financing, factoring offers two very distinct advantages over bank loans. First, it’s very easy to qualify for. Your main requirement is that you do business with strong commercial clients (or the government). Second, factoring financing grows with your business. As your invoicing grows, so does your financing. This enables you to easily cover the increasing costs of running a business that is growing.
A similar type of financing that is also offered by factoring companies is purchase order financing. Purchase order financing provides you with financing based on your purchase orders from large commercial clients. Purchase order financing is ideal for re-sellers and distributors that are growing quickly.
Whether you need financing because your customers pay you in 60 days or because you have a large purchase order from your biggest client, a factoring company will be able to offer alternatives to traditional financing.
Financing Your Business with Receivable Factoring
Do you do business with commercial or government customers? If you answered yes to that question, that means that you are also used to waiting up to 60 days to get your invoices paid. One of the most challenging facts of doing business with big companies is that they pay slowly. Sure, they pay all right – they just take their own sweet time to do it.
But you have expenses that you have to pay now. Suppliers need to be paid. Payroll must be met. This creates a big challenge for small and medium sized businesses.
Is the solution a business loan? It seldom is. They are hard to get. And when you get them, your hands are tied until the loan is paid off. With loans, you can only get one at a time. So if your business grows and you need more money, you are out of luck.
If your biggest headache is slow paying customers, a better solution is to factor your receivables. Receivable factoring provides you the necessary financing to pay employees, suppliers and taxes. Above all, it provides you with peace of mind by eliminating (or at least minimizing) your financial worries.
Receivables factoring works on a simple premise. Your invoices are valuable assets that can be financed. Basically, the factoring company advances you money for your slow paying invoices and waits until your customer pays. Of course, they charge a small fee for this service. This is how it works:
1. You do your work, as usual. You bill your customer but then submit a copy of the invoice to the factoring company for financing
2. The factoring company provides you an immediate advance on 70% to 90% of the invoice (there is a 10% to 30% reserve). You can use that money to meet payroll and pay expenses
3. The factoring company waits to get paid by your customer
4. Once they are paid, the transaction is settled and the factoring company rebates any reserves
As you can see, factoring gives you immediate money for your slow paying invoices, enabling you to run and grow your business. Qualifying for factoring is really easy. The biggest requirement is to do business with credit worthy customers. So, if your customers are good (but slow paying), you can finance them.
Receivables factoring is a great tool to finance your business and grow it to the next level.
Growing your Business with Invoice Factoring Financing
Is cash a little bit tight? Have you ever risked missing payroll? Have you ever had to pass up an opportunity because you did not have enough money? If so, you are not alone. Every business owner goes through those same challenges every day. Some come out on top. Others perish.
What is the biggest difference between those that succeed and those that perish? Cash flow. And plenty of it.
If you work with commercial or government clients, then you are already used to waiting up to 60 days to get paid by your clients. That is ok if your business has lots of resources and a stash of cash in the bank. But what if you don’t?
One of the most frustrating things that can happen to a business owner is realizing that his company is invoice rich and cash poor. Meaning, you have tons of money owed to you by clients (and payable in 60 days) but little cash to show for it. This does nothing for you, if you need to meet payroll in 3 days or need money to buy supplies for a new project. Fortunately, there is an easy way to turn those invoices into cash, without using any collections or heavy-handed tactics.
The solution involves factoring your invoices. Never heard of invoice factoring? You are not alone. Factoring is one of the most used and least talked about business financing tools. It allows you to convert your invoices into immediate cash. It helps you turn your invoice rich business into a cash rich business.
Qualifying for factoring is simple and only takes a few days. As opposed to business loans, you don’t need a long business history or reams of financial statements to qualify. All you need are invoices for credit worthy commercial clients or government clients.
And how does factoring work? Well, it simpler than you think. As soon as you have completed a job, you submit an invoice to your client and send a copy to the factoring company. The factoring company will advance you a substantial portion of your invoice, usually within a day. Once your client pays the invoice, the transaction is settled.
As you can see, factoring provides you with immediate cash as soon as you invoice. This helps you meet payroll, pay suppliers and take on new jobs. With factoring, you can streamline your billing cycle and grow your company, without ever needing a business loan.