factoring

The Importance Of Building a Cash Reserve For Your Business

October 21, 2011 By Administrator

For small business owners – cash is usually tight. There are expenses that have to be met quickly and customers that pay slowly. This combination makes it hard for business owners to build a reserve – even if it’s a small one. However, having a cash reserve is critical if your business is going to survive and grow. Without a cash reserve, your business runs the risk of becoming a casualty if there is an unexpected bump in your cash flow.

Many business owners pride themselves of running a tight ship by carefully managing their income and their expenses. The problem is that sometimes things are run so tight that a small unpredictable ripple – say a few late payments by customers – can send the whole business into a tail spin. This can quickly spiral out of control – especially if you miss payroll or key supplier payments. One way to address this problem is to have a cash reserve that can be used for emergencies.

The size of the cash reserve is a matter of much debate by experts. Some recommend a few months worth of business expenses – while others suggest you should have 6 months or more. In reality – you and your advisers will need to pick the number that is right for your company. Additionally, you have to take into consideration that cash that is sitting in the emergency fund is not producing returns for your company since you are not investing it in the business. Regardless, it’s usually a good idea to build a reserve, even if it’s done slowly and have to build it little by little. In this case something is better than nothing.

One approach to managing this problem is to combine a smaller cash reserve with a business financing product – such as a business loan or invoice factoring. This enables you to free some funds from the reserve and use them to grow the company and the added financing increases your ability to weather problems. This strategy of using business financing as part of your reserves can be useful if your cash flow problems are caused by slow paying customers. It will not necessarily be very useful if your cash flow problems are caused by slowing sales. This last point is very important.

Factoring is one tool that enables you to handle cash flow problems that are created by slow paying customers. It accelerates your revenues, providing predictable cash flow and minimizing problems from slow paying customers. When used in combination with a proper cash reserve, it can be a great tool to help you weather cash flow shortages.

Disclaimer: This article does not provide financial advice. If you need advice, please consult an expert.

Filed Under: Factoring Tagged With: cash reserve, factoring

Is Invoice Factoring Right For Your Company?

October 6, 2011 By Administrator

In this article we will help answer a common question we get from prospects – is invoice factoring right for my company? We’d like to start by saying that each situation is different and that this article does not intend to give legal or financial advice. If you need business financing, you should consult a professional to help you determine what is the right solution for you.

Invoice factoring solves one simple problem – cash flow shortages created by slow paying customers. Let’s say your company works with credit worthy commercial clients – and as it’s common – these clients pay their invoices in 30 to 60 days. For many large companies this is not a problem because they have substantial cash reserves that can be used to cover expenses. On the other hand, this can be a big problem for small companies that don’t have cash reserves. Why? Because many small companies have a number of immediate expenses that have to be paid – rent, suppliers and payroll – for example. Missing one of these payments can get the company in serious problems. This is where factoring comes in. Factoring can finance your slow paying invoices, providing the funds you need to meet expenses without having to worry about slow paying customers. In a nutshell, factoring works best for companies that can’t afford to wait up to 60 days to get paid by their customers.

On variable that you should definitely take into account when deciding about factoring is the issue of cost. Factoring is more expensive than most other financial solutions, which is why it is best if it’s used with transactions that have high profit margins. Generally, factoring will be right for your company if you can answer ‘yes’ to the following questions:

Would your company be better off if your customers paid quickly?
Have you turned away good prospects just because they paid in 60 days?
Do you have high profit margins?
Is your company profitable?

Filed Under: Factoring Tagged With: factoring, invoice factoring

Factoring Old Invoices

September 22, 2011 By Administrator

One common misconception is that factoring companies buy old invoices. This is actually not true. Factoring companies by slow paying invoices from credit worthy customers, which helps your cash flow. Factoring companies don’t buy old invoices.

By our definition, an old invoice is any invoice that is 90 days past terms is considered to be “old”. Most companies consider these invoices to have very little chance of getting paid – in other words they are collection problems. While it’d be great to be able to sell those invoices, you’ll find that there is a limited market for them – mostly collection companies. These invoices are best handled by a collections lawyer.

So, why would you factor an invoice? And, what invoices can be factored?

Factoring is a financial tool that is used to accelerate the payments from slow paying but credit worthy customers. For example, it’s common for small companies to sell products/services to larger companies and offer then net 30 payment terms. This gives the larger company 30 days to pay their invoice. However, it’s not unusual for customers to pay their invoices a few days past due – say in 40 days (or even 50 days) rather than 30 days. In this case, a factoring company can help you by advancing funds against your slow paying invoice. This gives your company the necessary funds to meet it’s current obligations and relieves the pressure from having to wait until your customer pays. The transaction is settled once your customer pays the invoice in full. The two key points to remember are the the invoice is payable in 30 to 60 days and the invoice is payable by a credit worthy commercial customer.

In summary – invoice factoring is a tool that you would use to accelerate your cash flow from credit worthy customers and not a tool that you can use with commercial customers with credit problems.

Filed Under: Factoring Tagged With: bad debt, collections, factoring, old invoices

Financing a Truck / Fleet Washing Business

September 8, 2011 By Administrator

To successfully operate a truck or fleet washing company an owner (or business manager) needs to be good at juggling multiple tasks and demands. They must be able to meet client demands, ensure that you have proper staffing and equipment and lastly, you must be able to manage your cash flow to ensure that you can meet your obligations. This last point – managing cash flow – can be one of the most difficult ones for new and growing fleet washing companies.

Like most commercial sales transactions, fleet washing companies need to give their customers net 30 to net 60 days to pay their invoices. But few small companies can afford to wait that long to get paid. They have to pay employees, buy and maintain equipment and cover a number of expenses to keep the company going. Waiting for 60 days to get paid can seem like an eternity when you have bills to pay. One approach that business owners take to solve this problem is to try and get quick payments from customers – usually by offering incentive discounts. Another approach is to delay supplier payments – at least until a key payment comes in. While these approaches can work – they can only go so far. For many, the better solution is to use a business financing tool, such as invoice factoring.

Invoice factoring can help reduce the cash flow problems of a fleet washing company. It provides the funds your company needs to pay employees, meet your obligations and target new business opportunities. Factoring accelerates your cash flow by using an intermediary finance company that provides an advance for your invoices from slow paying (but credit worthy) commercial customers. The factoring advance gives you the funds you need to meet your expenses while the factoring company holds the invoice until final payment.

One advantage of working with a factoring company is that factoring is easier to obtain than a conventional business loan. The most important requirement is that your fleet washing company must work with clients that have good commercial credit. Also, your company must be free of legal and tax problems. This makes it an ideal solution for companies in the fleet washing business. And, remember that for many factoring companies, a small or medium sized fleet washing company with few assets but a very strong customer list is an ideal client.

Filed Under: Business Services Tagged With: detailing, factoring, fleet washing

Business Financing For Directional Boring (and Directional Drilling) Companies

September 7, 2011 By Administrator

Companies that are in the directional drilling and/or directional boring industry have an interesting predicament. Their customers are usually large utilities or oilfield companies with good commercial credit and a great payment track record. The challenge is that they pay slowly – they can take anywhere from 30 to 60 days to pay an invoice. In the meantime, you have to deliver the work and cover all your expenses – equipment, payroll and rent to name a few. Few small companies can actually afford to wait that long for payment.

One way to deal with this situation is to try and accelerate payments by offering quick payment discounts to your clients. For example, offering 2% net 10 terms (2% discount if they pay in 10 days or less) is common. This will work for some, but many customers will chose to pay you slowly because they want to conserve their own cash. Another alternative is to use business financing to try and bridge the gap between invoicing and payment. One alternative that has been gaining popularity in recent years is invoice factoring.

Factoring invoices solves the cash flow problem by accelerating your revenues. Factoring provides you wish a quick payment for your slow paying invoices, relieving your cash flow pressures and improving your company’s liquidity. It works by using an intermediary company, called a factoring company, that advances funds against your invoices. They pay you and then hold the invoice until your customer pays. The transaction is then settled once your customer pays in full.

One advantage of factoring is that it’s easier to obtain than conventional business loans. This is because the transaction uses your invoices from strong customers as the main collateral. Additionally, to qualify, your company must be clear of legal and tax problems. This makes factoring a solution that can be used by small and medium sized companies that don’t have substantial conventional assets but have solid paying customers.

Factoring invoices can be a great solution for directional drilling / boring companies that have cash flow problems that stem from slow paying customers.

Filed Under: Construction Tagged With: directional boring, directional drilling, factoring

Should You Factor Customers With Collection Problems?

August 24, 2011 By Administrator

The short answer is – no. It’s not uncommon for companies to want to factor their problem customer accounts. The obvious logic is that if you can shift the credit risk to another business – why not do it? The fact of the matter is that factoring companies are good at analyzing credit and they would probably catch invoices from problem customers before buying them anyways. And if they bough it, it would end up being a very expensive proposition for the client because factoring fees increase over time – so the longer a customer takes to pay the more expensive it is for you. To add to it, many factoring contracts have a clause that requires a client to purchase invoices that are not paid within 90 days (this varies). So to sum it up, selling invoices from problem customers to a factoring company is always a bad idea.

If you have a problem customer, your best bet is to speak to an attorney or an expert in collections. However, if you are an invoice factoring client you should leverage your factoring company’s credit expertise and ask them to help you review the credit quality of your customer portfolio. A good factoring company will review your portfolio with you and help you flag customers that are collections problems – or that could turn into collection problems soon. This helps you minimize the chances of selling to problem customers in the first place – which is the best way to avoid collections problems.

A factoring company can also help you with the cash flow problems that are created by good customers that pay slowly. It’s common for companies to be paid on net 30 to net 60 days. Many small businesses can’t afford to wait that long for payment. They have many immediate obligations to meet – supplier payments, rent and payroll – and few reserves to cover such expenses. In this case, a factoring company can advance funds against your slow paying invoices from good customers, providing you with the liquidity you need to pay expenses and go after new opportunities. One big advantage of factoring is that it’s easier and faster to obtain than other solutions. Because of this, factoring has been gaining popularity in recent years as an ideal solution for small and midsized companies.

Filed Under: Factoring Tagged With: collections, factoring, invoice factoring

How To Offer Net 30 Payment Terms With Minimal Worry

August 23, 2011 By Administrator

Most commercial customers demand net 30 to net 60 day payment terms for their purchases. It’s a basic rule of business – if you want to make commercial sales you need to offer credit terms. But this is a very delicate challenge. If your credit policies are lenient, you will improve sales but hurt profitability (because of non payments). On the other hand, if your credit policies are too strict, you will lose sales. In an ideal world, you want to offer credit to customers that deserve it and deny credit to those that don’t.

There is one additional worry for companies that plan to offer net 30 payment terms – that is – can they actually afford to do it? Not every company has the wherewithal to wait 30 days for payments. There are suppliers, rent and employees that need to be paid – often sooner than 30 days. And they need to be paid on time or you risk losing key suppliers or personnel. One way to address this problem is to use a business financing tool known as invoice factoring.

When used correctly, invoice factoring can help you minimize both the credit risk and cash flow problems of offering net 30 terms. Factoring works by using a financial intermediary, called a factoring company, that acts as a credit manager and invoice financier. The factoring company helps you determine the commercial credit worthiness of your customers so that you can decide who to offer terms to. Also, they can advance funds against your net 30 invoices to credit worthy customers. This provides the liquidity you need to help cover your operation expenses.

One advantage of factoring over other business financing solutions is that it’s easier to obtain. To qualify for the funding advance, your company must invoice credit worthy customers. Aside from that, your invoices need to be free for legal or tax encumbrances. This makes factoring a perfect financing and credit solution for small growing companies that have a potential roster of good customers.

Filed Under: Invoice Factoring Tagged With: business credit, factoring, invoice factoring

Business Financing for Subcontractors in the Oil and Gas Industry

August 18, 2011 By Administrator

Most subcontractors in the oil and gas industry have enjoyed a number of good years, despite the recession. However, many large oil and gas clients have grown more conservative in the expenditures and have started to take longer to pay their invoices. Companies that paid in 30 days are now paying in net 45. Those that used to pay in net 45 days are now paying in net 60 days. This has created a challenge for many of the smaller providers, who don’t always have the resources to wait a long time to get paid.

Smaller subcontractors in the oil and gas industry have been focused on growth and don’t always have the necessary cash cushion to absorb slow invoice payments. This puts business owners in a difficult position where they have to deal with their cash flow problems by either delaying expenses or asking customers for prompt payment. These strategies usually work – at least for a while. However, delaying expenses and demanding quick payments won’t always work for the long term. A better solution is to bridge the cash flow gap using business financing.

There is a solution that has been gaining notoriety in recent years that is designed specifically to fix the cash flow problems created by slow paying invoices – it’s called invoice factoring. It enables small businesses to get quick payment for their invoices, providing the needed funds to meet current expenses and new growth investments. Factoring is specifically designed for small businesses so it’s easier and faster to obtain than conventional financing.

Factoring works by using a financial intermediary, called a factoring company, that buys your invoices and pays you upfront for them. This gives your company the funds it needs to operate while the factoring company holds the invoice until the customer pays. Once the customer pays, on their usual schedule, the transaction is settled. A key feature of factoring is that your customer does not have to pay sooner – they pay on their usual terms.

Qualifying for factoring is relatively easy. The biggest requirement is that your company needs to work with credit worthy customers. Most of the larger operators in the oil and gas industry have stellar credit, so this should not be a problem. Aside from that, your company needs to be free of legal and tax problems. Most factoring companies can approve a factoring line for initial funding in about a week or two.

Filed Under: Factoring Tagged With: business financing, factoring, oil and gas

Invoice Factoring – Defined

August 16, 2011 By Administrator

Invoice factoring is a type of business financing that has been gaining popularity in the past few years. It is specifically designed to help companies that have cash flow problems created by slow paying customers. Invoice factoring has different qualification requirements that most conventional forms of business financing and it is relatively easier to obtain than other types of business financing.

Let’s look at a common situation. A small company sells a product or a service to a larger company. Once the small company delivers it’s product or service it also sends an invoice to the large customer. However, the large customer does not pay immediately. Rather, they pay the invoice in 30 to 60 days. In the meantime, the small company still has it’s own immediate expenses – payroll, rent, suppliers – that need to be met. These expenses are usually covered from the small company’s reserves. But what if the cash reserves are low? There are three options. One, you can delay paying your expenses – usually not a good idea. Two, you can ask your customer to pay sooner – this works sometimes. Three, you can use a business financing solution like factoring to bridge the gap.

Invoice factoring works by using a financial intermediary – called a factoring company – to buy your invoices, which provides you with an immediate payment. Your small business gets immediate funds that can be used to cover expenses and invest in new opportunities. Then, the factoring company holds the invoices until your customer pays. Once your customer pays, the transaction is settled. It’s common for companies to factor invoices from several customers, which ensures their cash flow needs are met.

One big advantage of invoice factoring is that your financing is solely based on your sales (or invoices). This makes it an ideal tool for companies that are growing, since the factoring line will usually grow with your business. And as opposed to other types of business financing, factoring is relatively easy to qualify for. The most important requirement is that your customers need to have good commercial credit. Aside form that, your company needs to be free of legal or tax problems.

Filed Under: Invoice Factoring Tagged With: factoring, invoice factoring

Business Financing for Staffing Agencies

August 12, 2011 By Administrator

Many entrepreneurs gravitate towards starting staffing agencies because they are thought to be less capital intensive than other industries. The concept is that you only hire the employees you need them, when you need them and only to handle the contracts that you have. Although in principle this sounds enticing, the reality is that staffing agencies do require a substantial investment (or at least business financing) if you plan to grow them. This is because income and expenses are usually mismatched.

What do we mean when we say that staffing agency income and expenses are mismatched? Well, most staffing agency employees need to be paid every week (or every two weeks) through payroll. However, most staffing agency customers pay their invoices on net-30 or net-60 day terms. Said simply, expenses are fairly immediate but your income is delayed by 30 to 60 days. This means that the company needs to cover payroll from its own reserves while waiting to be paid. And if you run out of reserves, your company will be in trouble – or at the least – it wont be able to take on new clients.

There are two ways to approach this problem. One way is to ask customers to pay quickly. However, this is often difficult as large customers usually like to be able to pay their invoices on net 30 to net 60 terms. Another approach is to accelerate your customer payments using a factoring program for staffing agencies. This program uses a financial intermediary that advances you funds based on your open invoices to credit worthy customers. You get paid by the factoring company (financial intermediary) immediately – who then holds your invoices until they get paid by your end customer.

One of the advantages of factoring is that it is easier to obtain than other forms of business financing. The most important requirement to qualify is that your customers have good commercial credit. This is important because factoring companies consider your invoices to be your most important asset. Aside from this, your company needs to be free of legal and tax problems.

Working with a factoring companies can be an ideal solution for a small or medium sized staffing agency whose biggest problem is that it can’t afford to wait up to 60 days to get paid by customers.

Filed Under: Staffing Tagged With: business financing, employment agencies, factoring, staffing agencies

A Business Financing Alternative For Companies that Can’t Get a Business Loan

July 12, 2011 By Administrator

Although the recession officially ended a few years ago, the economy is still reeling from the economic after-shocks of the credit bubble. One of the most difficult challenges that small business owners are facing is the lack of conventional business financing options – namely business loans and lines of credit. Most lending institutions have sustained substantial financial problems due to the recession and are unable (or unwilling) to extend loans to small businesses, save those with the best collateral and performance history.

Businesses owners, on the other hand, have their own set of problems because cash flow is unusually tight. Customers that used to pay in 15 or 30 days are now taking up to 60 days to pays their invoices. However, small businesses still have to pay employees and vendors on a timely basis. This creates a situation that forces managers to juggle payments between vendors. To complicate matters, many small businesses are turning away new orders simply because they are unsure if their cash flow will allow them to service the client properly. This create a vicious cycle that can send the business into a tail spin. Recovering from that tail spin is critical if the business is to succeed.

There is one way to break this vicious cycle, and that is to use business financing to strengthen the company’s cash flow. This will enable the business to take on new orders and to grow. Financial institutions will only extend funding to companies that have substantial assets and solid cash flows. Furthermore, many will require that you show two years worth of financial statements showing solid growth. In this post-recession economy, few companies can meet these criteria. For many, the only option is to use an alternative source of financing. One alternative product that has been gaining traction in the past few years is invoice factoring.

Invoice factoring is designed to solve the cash flow problem that is created by slow paying customers. It accelerates the receipt of cash, providing the liquidity a company needs to cover current business expenses. By implementing a factoring solution, a company can eliminating the conventional net 60 day wait for payment. This allows the company to make business decisions based on the potential of a customer, rather than their payment habits.

Accounts receivable factoring works by using a financial intermediary between your company and your customer. The intermediary, called a factoring company, buys your invoices and pays for them immediately. This provides your company with the needed liquidity to operate and grow. The transaction is then settled once your customer pays the invoice in full, usually 30 to 60 days later.

Most factoring financing transactions are structured as the purchase of an invoice on two installments. The first installment, called the advance, is given to your company as soon as the work is completed and you invoice your customer. The advance is sent to your company by bank wire or by using a direct deposit as soon as the invoice is verified. The advance is determined as a percentage of the invoice, and usually averages about 80% of your invoice. The remainder 20%, less financing fees, as rebated to your company as soon as your customer pays the invoice in full. The rebate settles the transaction.

As opposed to other forms of financing, factoring is widely available and relatively easy to obtain compared to other forms of funding. To qualify for factoring your company must work with credit worthy customers and to be free of major problems, like liens and judgments. Customer credit worthiness is particularly important because the whole premise of factoring involves leveraging your customers commercial credit to your own advantage. This makes invoice factoring an ideal solution for small and midsized companies that have a solid roster of customers and whose biggest challenge is that they can’t afford to wait 60 days for their customers to pay.

Filed Under: Factoring Tagged With: business financing, factoring, invoice factoring

Why a Federal Tax Lien (FTL) Affects Your Ability to get Factoring

June 30, 2011 By Administrator

It’s not unusual for companies with tax problems to need business financing to be able to operate, since most of these companies also have cash flow problems. While these company owners understand why they wont be able to get a business loan or line of credit when the company has tax liens, they are always surprised when they find out that getting invoice factoring will be difficult to (unless they get an IRS subordination). Why is this the case? Isn’t the factoring company just buying the invoice? Why would the factoring company care about a federal tax lien (or other liens)?

Technically, what the factoring company is buying are the financial rights to the invoice. It’s not a tangible good per se – but rather a right. And here is where it can get tricky, a lien can encroach on those rights. Let me give you an example:

Let’s say that hypothetical company XYZ Inc. has a year old federal tax lien that encroaches all assets. It then enters into a financing agreement and starts factoring. At this point, the factoring company has advanced 80% of for the invoices and is waiting for payment from the client’s customer. The IRS could (and many times will) direct the customer to pay the IRS first instead of the factoring company. Things can get trickier, but I wont go into all the complicated details. But you can see would be a losing proposition for the factoring company. They have advanced 80% to the client and won’t be able to collect from the customer. As you can see – it’s not as simple as “selling your invoices to the factoring company and forgetting about it!”.

However, you can factor your invoices if you, the IRS and the factoring company enter into an inter-creditor agreement where the IRS subordinates their position to the factoring company. In this case, if the factoring company does their paperwork well, they have first position on the invoice.

As a disclaimer – we are not attorneys and we do not provide legal or financial advise. This article is not to be considered legal advise. Please hire a competent professional if you need advise.

Filed Under: Factoring Tagged With: factoring, federal tax lien, ftl

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