Factoring Blog

Is Invoice Factoring Right For Your Company?

October 6, 2011 By

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:

  1. Would your company be better off if your customers paid quickly?
  2. Have you turned away good prospects just because they paid in 60 days?
  3. Do you have high profit margins?
  4. Is your company profitable?
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Should You Factor Customers With Collection Problems?

August 24, 2011 By

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.

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How To Offer Net 30 Payment Terms With Minimal Worry

August 23, 2011 By

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.

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Invoice Factoring – Defined

August 16, 2011 By

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.

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

July 12, 2011 By

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.

 

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