Debt Free Financing With Invoices Or Purchase Orders
Even though a bank or loan institution is not interested in possessing equipment
, there is always a risk that the company might lose assets and equity by not being able to make periodic payments for conventional loans. Conventional loan institutions always file a UCC-1 to secure loans.
It is particularly of concernn for newer companies that are in a growth cycle. It is common for a company to have a lot of invoices on the aging accounts receiving report along with the anxiety of not knowing how much time it is going to take for various companies or the government to pay invoices in full.
Companies suffering from cash flow problems due to financing accounts receivable often offer a discount to clients as an initiative to pay invoices before they are due and payable. An example is 2-10-Net-30 wherein a 2% discount is offered a client who pays within 10 days. Otherwise, it is due and payable in 30 days with no discount. Sometimes it is a 3-10-Net-30.
Management in a business must also take into consideration the time value of money as well as the cost of time it takes to make application for loans and increases in a line of credit. An owner or manager should consider the time needed to apply plus the time value of money.The time value of money is defined as less money today is worth more than the full amount at a future date.
An alternative process of financing based on accounts receivable or purchase orders is available to companies without leveraging against company assets or equity. Factoring is a process of financing invoices and/or Purchase orders. It is available to companies that do business with business or business with the government.
When a company offers an early pay discount to clients, and starts invoice factoring, it makes sense for the company to quit offering the early pay discount to offset the cost of factoring.
Companies are able to take advantage of offers from suppliers who offer an early pay discount. Paying invoices early becomes possible when receiving factoring. It is also a way of offsetting the cost of factoring. That can also be a means of offsetting the cost of factoring.
The amount of funds available increases automatically as sales increase. Thus there is no need to apply for a larger line of credit.
In order for companies to be competitive, it usually has to have the ability to extend net-30 days to clients. When the company is not in a position to extend terms, the company must rely on conventional loans or alternative financing. Factoring is similar to having a line of credit except it is debt-free rather than a loan. Factoring doe not enter the balance sheet as a debt.It is the sale of an asset.
Factoring is a discounted purchase not subject to bank regulation. Factoring does not adversely effect the balance sheet. It is a way of converting invoices into cash.
Since the risk a factor takes is not with the company but rather the clients of that company, the factor is more interested in the creditworthiness of the company's clients. So even if the company has less than perfect credit, it is still possible to factor a company's invoices or purchase orders. A company can improve credit by using invoice or purchase order factoring.
There are not requirements for where the money is to be spent when a company factors invoices or purchase orders. The funds can be used for what the company deems most beneficial.
A factor usually advances as much as eighty-percent of the amount of an invoice almost immediately after an invoice has been submitted. The remaining balance is paid minus a discount after the client has paid the invoice in full. Risks associated with any particular industry determines the amount that can be advanced when a company submits an invoice to a factor. For example, the percentage for factoring construction is usually less due to variables associated with the construction industry.
The money can be advanced only after the products and/or services have been provided for another company or the government. Government vendors are pre-qualified by factors for factoring. It is quite frequent that city, county, state and federal government agencies are slow to pay invoices but their credit is good.
It is a high priority for a company to have positive cash. It is difficult for a business to grow when a company suffers from negative cash flow. Factoring offers an alternative debt-free way of financing to improve cash flow.
by: Russell Wardle
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