As you might have guessed, the “F” word that we are talking about is factoring. Once shunned by businesses and the finance industry, invoice factoring has become a valuable tool in maintaining cash flow and working capital.
Often, companies find themselves to be asset rich but cash poor. While business is thriving, they have a healthy amount of account receivables on the books but are strapped for immediate cash.
A loan is a loan whether it is a government-backed SBA loan, a secured equity loan through a bank, or a personal loan through an associate. Each of them has a principal and interest amount that must be paid back either in a lump sum or over time.
One option for a quick infusion of cash is invoice factoring.
Invoice factoring is available to a business that invoices other businesses (B2B) or government agencies (B2G) and provides short-term working capital in exchange for selling and assigning invoices to a factoring company. In simple terms, the factoring company advances a business roughly 70%-80% of the invoice’s value when an invoice is purchased. Then, once the invoice is paid, the factoring company pays the remaining 30% to 20% (minus agreed upon factoring fees).
Factoring is not a loan, it represents work provided to a client in the form of a service or a product, and therefore the money belongs to the company. The invoice factoring company is simply advancing the money that the business has coming to it, in exchange for a small percentage of the amount owed.
Small to medium size businesses, because of their generally tight cashflow tolerances, are the most likely candidates for invoice factoring. If a major client or a couple of small clients delay paying an invoice, it can become an emergency for the business owner who needs to meet payroll or a quarterly tax obligation.
But aside from cash crunches, invoice factoring can also help a business take advantage of opportunities. There are many incidences where a small business suddenly receives an order that is beyond their current capacity to fill. Immediate cash may be needed for extra employees, additional equipment, or a larger supply of raw materials. Expanding operations and product outflow temporarily or permanently can boost a business to the next level.
Many times, if a business runs into a cash crunch, it might offer one time discounts to customers with outstanding invoices. This process is risky in that it sends a red flag to your customers that your business might be teetering on the edge. However, the factoring process is invisible to the client.
A factoring discount rate is determined by a number of variables such as the type of business you are in, (for example construction is more expensive than manufacturing) the number of monthly invoices to be factored, the dollar amount of each invoice, the credit quality of your clients and their payment history, as well as other credit risks. In addition to the per-transaction discount rate, a factoring company may charge an additional monthly fee on accounts that require specialized services or customized financing.
Typical factoring discounts range from 3%-5% for 30 days. An invoice that is not paid within 30 days will accrue daily fees at 1/30th of the factoring rate per day. For instance, if your factoring discount rate is 3½%, and the invoice does not pay within 30 days from the date we fund the invoice, the daily fee would be 1/30th of 3 ½ % or .1167% per day. On a $1,000.00 invoice, the amount would be $1.17 per day.
As with banks, there is a process for setting up an account with a factoring company, and building a trusted relationship is important. Factoring companies generally look at three things, the current business financial statement (Balance Sheet & P&L), a current accounts receivable aging report, and three months of your most recent bank statements, before purchasing receivables.
Once a business relationship is established with a factoring company, a company can present only the invoices they want to factor, and the company will be approved for a monthly invoice factoring amount. At that point, the turnaround time for factoring a group of receivables and receiving cash can be as short as 24 hours.
If you find that your business is suffering from the symptoms described above, contact Business Finance Corporation on the web at BFC.vegas or by phone 702-947-3800
Your Partner in Success,