Factoring. Cash Without Borrowing

How to Increase Cash Flow Without Borrowing

Cash flow is one of the main reasons businesses fail. At one time or another, every business, even successful ones, have experienced poor cash flow. Cash flow does not have to be a problem any more. Do not be fooled -- banks are not the only places you can get funding. Other solutions are available and you do not have to borrow.

What is Factoring?

One solution is called factoring. Factoring is the process of selling accounts receivable to an investor rather than waiting to collect the money from the customer.

Oh, the Irony…

Factoring has an ironic distinction: It is the financial backbone of many of America's most successful businesses. Why is this ironic? Because factoring is not taught in business colleges, is seldom mentioned in business plans and is relatively unknown to the majority of American business people. Yet it is a financial process that frees up billions of dollars every year, enabling thousands of businesses to grow and prosper.

Factoring has been around for thousands of years. Factors are investors who pay cash for the right to receive the future payments on your invoices.

An unpaid receivable or invoice has value. It is a debt your customer has agreed to pay in the near future.

Factoring Principals

Although factoring deals exclusively with business-to-business transactions, a large percentage of the retail business uses a factoring principal. MasterCard, Visa, and American Express all use a form of factoring in their retail transactions. Using the purest definition of the word, these large consumer finance companies are really just large factors of consumer paper.

Think about it: You make a purchase at Sears and charge it to your MasterCard. The store gets paid almost immediately, even though you do not make payment until you are ready. For this service, the credit card company charges Sears a fee (typical fees range from two to four percent of the sale).

The Benefits

Factoring can offer many benefits to cash-hungry companies. Rather than wait 30, 60, 90 days or longer for payment on a product or service that has already been delivered, a business can factor (sell) its receivables for cash at a small discount off the amount of the invoice.

Payroll, marketing efforts, and working capital are just a few of the business needs that can be met with this instant cash.

Factoring provides the means for a manufacturer to replenish inventory and make more products to sell: There is no longer a need to wait for earlier sales to be paid. Factoring is not just a cash management tool for manufacturers: Almost any type of business can benefit from factoring.

Generally, a business that extends credit will have 10 to 20 percent of its annual sales tied up in accounts receivable at any given time. Think for a moment about how much money is tied up in 60 days' worth of invoices: You cannot pay the power bill or this week's payroll with a customer's invoice, but you can sell that invoice for the cash to meet those obligations.

Factoring is a fast and easy process. The factor buys the invoice at a discount, usually a few percentage points less than the face value of the invoice.

The Drawbacks

People consider the discount a small cost of doing business. A four-percent discount for a 30-day invoice is common. Compared with the problem of not having cash when you need it to operate, the four-percent discount is negligible. Look at the factor's discount as though your business had offered the customer a discount for paying cash. It works out the same.

Companies consider the discount the same way they treat a sales price: It is simply the cost of generating cash flow, much like discounting merchandise is the cost of generating sales.

Factoring is a cash flow tool used by a variety of businesses, not just those who are small or struggling. Many companies factor to reduce the overhead of their own accounting department. Others use factoring to generate cash, which can be used to expand marketing efforts and increase production.

Why Factoring Appeals to the Start-Up

Factoring is especially appealing to young and rapidly growing companies. Since the process shortens their business cycle, these businesses can grow faster. The ability to make more products to sell while waiting for invoices to be paid is largely eliminated. Such businesses usually net much more profit with factoring than without, even when the discount is considered.

Factoring vs. Bank Loans

So, why not simply go over to the friendly banker for a loan to alleviate cash flow problems? A loan can be difficult if not impossible to receive, especially for a young, high-growth operation, because bankers are not expected to decrease lending restrictions soon. The relationships between businesses and their bankers are not as strong or as dependable as they used to be.

The impact of a loan is much different than that of the factoring process on a business. A loan places a debt on your business balance sheet, which costs you interest. By contrast, factoring puts money in the bank without the creation of any obligation. Frequently, the factoring discount will be less than the current loan interest rate.

Loans are largely dependent on the borrower's financial soundness, whereas factoring is more interested in the soundness of the client's customers and not the client's business itself. This is a real plus for new businesses without established track records.

There are many situations where factoring can help a business meet its cash flow needs. It provides a continuing source of operating capital without incurring debt, which can result in growth opportunities that dramatically increase the bottom line. Virtually any business can benefit from factoring as part of its overall operating philosophy.

Every good businessperson must understand the concept and benefits of factoring in order to operate as profitably as possible. The following chart can help you understand the differences between factoring and other sources of funding.

For more information on factoring and other non-traditional ways to obtain funding, contact Fred Coutts at (206) 364-9613 or Fred@FredCoutts.com. Please visit my website at http://www.fredcoutts.com/index3.htm for more information on powerful funding programs without going through a bank

Fred Coutts, CPA, CMA. All Rights Reserved.

Since 1980, Fred Coutts has been crafting powerful cash flow solutions for businesses and individuals alike, from entreptreneurs to "Fortune 500" companies. He has built a solid foundation of financial and operational experience through many executive roles, including those as CFO and Controller. Fred is well versed and experienced in finance, accounting, and business operations.

Over the years Fred has developed relationships with funding connections nationwide, both traditional and non-traditional sources to help you meet your cash flow needs.

Professional Certifications:

---Certified in Public Accounting(CPA)

---Certified in Management Accounting(CMA)

Accounts Receivable Factoring Basics

Having to wait up to 60 days for commercial customers to pay their invoices can be one of the biggest challenges that owners of small to mid size companies have to face. Waiting to get paid is not usually an issue for well-established companies that have a significant cash cushion in the bank. However, it can seriously affect smaller companies or companies that are going through a significant growth phase.

Most owners react to this cash flow problem by going to the bank, hoping to obtain a loan or a line of credit. However, banks have strict lending guidelines and seldom lend money to businesses that cannot demonstrate three years of profitable operations and cannot provide audited financial statements. Furthermore, most bank financing products tend to have arbitrary limits, which are based on your existing financial capacity, rather than your projected growth.

What growing businesses need is a form of financing that is tied to sales, allowing you to get more working capital, as your company grows. Furthermore, the solution should work for small and mid size businesses that may not have established credit histories, but that have great paying customers. Is there such a solution?

If you are in a situation where your business is growing and selling products or services to great credit worthy customers, you should consider factoring your invoices as a possible solution. Accounts receivable factoring allows you to convert your slow paying receivables into cash, by financing them through an accounts receivable factoring company. Accounts receivable factoring is a flexible line of financing that is directly tied to your sales. Basically, the more you sell to good customers the more financing you can obtain.

The process is fairly simple. Once an accounts receivable factoring agreement has been established, you send copies of your invoices to the factoring company, who in turn advances you a significant portion of their value. A small percentage is usually not advanced and kept as a reserve to cover disputes/etc. You obtain immediate funding to pay for company expenses and grow the business, while the factoring company waits to be paid by your customers. Once they get paid, they will rebate the funds that were kept in reserve and charge a small fee for the service.

Accounts receivable factoring is an ideal product for companies that are growing quickly and cannot afford to wait 30 to 60 days to receive payment from their customers. It provides you with the necessary financing to operate and grow your business, and as opposed to bank products; it’s easy to qualify for this service.

Invoice Factoring Group

Invoice Factoring Group is a factoring company that can provide you with a free accounts receivable factoring or receivables factoring quote. Marco Terry, the president, can be reached at (866) 730 1922.

What is Freight Bill Factoring?

Trucking company owners know that cash is king and prompt paying clients are critical to the company’s success. But, what can you do if you get a good client that insists on paying their invoice in 30 days or more? How do you pay fuel, drivers and repairs while you wait to get paid?

In the past, the only option you had was to take the client and grit your teeth.

However, there is an option that has been gaining popularity with the trucking community. It’s called freight bill factoring. Freight factoring eliminates the payment wait and gets your freight bills paid in a couple of days. But, transportation factoring is very different than a business loan. It works by selling your freight bills to a freight factoring company, who pays you for them and then waits to get paid by your customers/freight brokers.

Transportation factoring can be easy to use and works as follows:

1. You deliver the load and issue a freight bill
2. You sell the freight bill to the factoring company, who pays you a first installment of 90% to 97% of the freight bill
3. You get immediate money while the factoring company waits
4. Once the factoring company gets paid, any remaining reserves (less a small fee) are returned as your second installment

Freight factoring rates vary, but they go from 1.5% to 3% per 30 days depending on volume, duration of transactions and customer selection. A factoring line can be established in a little as 3 days, provided you have all your company documentation in order.

About Commercial Capital LLC
Looking for freight bill factoring. Commercial Capital provides freight factoring and transportation factoring to truckers. For a free consultation, call Marco Terry at (866) 730 1922

Factoring- Accounts Receivable, Cash Flow and Factoring Invoice

If you own a flourishing business, you are probably aware of the importance of factoring invoices. The expression ‘factoring invoices’ sounds ubiquitous but what exactly does it mean and is it useful? These questions frequently cause confusion, but factoring invoices is easy to understand.

Factoring is the exchange of a company's commercial invoices or accounts receivable into immediate cash. This is done by selling those accounts at a discount. With invoice factoring, you can easily get 70 to 80% of an invoice's face value wired to your account within 24 to 48 hours of the invoice being issued and approved. It’s an easy way to get ready cash.

There is a misconception that invoice factoring is a kind of loan. This is absolutely wrong, as with factoring you pay neither interest nor principal. Invoice factoring is not a loan. The main benefit of invoice factoring is that no liability will appear on a company's balance sheet due to factoring; furthermore, it financially revitalizes the business.

In invoice factoring, a company sells one of its assets or accounts receivable for an agreed-upon ‘fee’ to obtain a more liquid asset, cash. In short, it is a kind of self-financing, having its own growth with debt-free funding; it is like selling your vehicle to someone- the two of you agree on a price and the transaction is finalized.

As factoring invoices is not a loan, funding is not based on a company's ability to repay the amount advanced, but on the ability of the company's customers to pay what is owed the company for the purchase of its goods or services. Nowadays people prefer account receivable factoring over other traditional funding sources which usually require all the assets available to a company for collateral on a credit line. Factoring is a Receivables-based credit line that needs no other collateral.

The main highlight of invoice factoring is that you can have cash on demand to meet seasonal demands or accommodate new and larger clients who may demand longer terms or use up any excess working capital you have on hand. In short, factoring invoices gives you the option of offering terms to your customers, thus helping you increase your customer base.

If you are looking for a company that can help you with invoice factoring or that can provide you with more information on receivables factoring, account receivable factoring and factoring invoices please visit www.magfinancial.com.

Mr.Scott Stevens is well known author who writes about financial services such as cash flow programs, account receivables, factor receivable etc. Find more information about magnolia financial service at http://www.magfinancial.com