Net-30 Day Invoices Can Be Converted To Immediate Cash
Asset-based financing is financing common items such as vehicles
, equipment or other tangible assets. It can be risky offering equipment as collateral as a lending institution can repossess the collateral if the loan goes into default. Other company assets also can be at risk to make up any deficit from a repossession through a UCC-1 filing.Tangibles are not the only collateral eligible for financing. Accounts receivable are funds owed to you by your clients for goods and/or services supplied or rendered. For example, if you sold goods or services to another company extending credit terms allowing the client to pay the invoice within thirty days, in essence, you are making an interest-free loan for thirty days.
Factoring is way of financing a business by using the amount of money other people owe you to finance your business. Accounts receivable are used to finance a business. If you need money immediately, factoring allows you to receive money from a third party using the accounts receivable as collateral. A percentage based on the industry and common risks determine the percentage a factor will advance immediately once an invoice has been submitted. After your client pays the invoice in full, the factor pays the remaining balance minus a discount fee out of the reserve.
After the invoice has been submitted, the company is able to receive cash almost immediately without encumbering tangible assets. It is not a loan inasmuch as it is the sale of an asset. The factor owns the account until it has been paid in full. The factor allows the company to be the first line of contact whenever there is a problem with collection of an invoice. It is important for businesses to maintain a relationship with their own clients.
Companies accepting credit cards participate in the basic principles of factoring. When a credit card is used to buy products or services, the credit card company pays the business almost immediately after the invoice has been submitted. However, a discount is charge by the credit card company. Factoring is similar except the factor pay an advance followed by the reserve minus the discount. Thus, one of the differences between factoring and accepting credit cards is the business is paid in two installments for factoring and one installment when accepting credit cards. However, both are charged a discount fee. Another difference between credit cards and factoring is that factoring is only for business to business or business to government invoices.
In order to create a positive cash flow, some companies offer early pay incentives. Without a track record to determine who will pay, new companies often have difficulty determining how early pay incentives will effect their cash flow. When a company does factoring, it is easier to manage the company's cash flow. Furthermore, the company can discontinue offering early pay incentives in order to offset the cost of the factoring. The company benefits in more than one way.
Often, suppliers will offer discounts to companies as an incentive to pay invoices early. With newly found immediate funds, it is possible for the beneficiaries of factoring to be able to pay cash for materials. This also can be a way to offset the cost of factoring.
Factoring grows automatically as the business grows. So once factoring is in place, there is no need to apply for additional funding. As the business continues to increase in invoices and volume, more and immediate funding becomes available. Once the company becomes able to qualify for conventional loans, it is best to consider factoring as transitional and temporary. It is usually less expensive to utilize conventional loans.
Many companies are able to finance for thirty days without credit problems. However, the invoices extending past the thirty-day window create cash flow problems. Thus, some companies will delay submissions in order to cut the cost of factoring. For example, they will factor only the invoices that have matured past thirty days. Government invoices are notorious for making late payments. However, government invoices are considered by factors to be pre-qualified because the government is considered a favorable credit risk.
The lack of capitalization is the number one reason companies fail. It is extremely important for company owners and managers to understand the importance of the time-value of money. A business does not continue to grow if the cash does not continue to flow.
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