Paper Trail Proides Answers To Cash Flow Problems
Conventional business loans from banks are usually the least expensive and most ideal way of financing business operations
. However, when offering thirty day terms to clients puts a strain on cash flow, and a credit line at the bank is either not an option or inadequate as a credit line, an alternative is to use the paper assets such as accounts receivable or purchase orders. Under the right circumstances, this is a very viable option for business to business or business to government transactions.A business has to consider reasons a bank will not set up a line of credit. A business should have a track record and good credit in order to be able to obtain a credit line with the bank. It is best to have a good credit rating. However, utilization of paper assets is possible as long as the business is invoicing creditworthy customers.
When looking for creditworthy business, one should consider city, county, state or federal government transactions. A business providing goods or services for the government almost automatically qualifies to to have invoices or purchase orders factored.
Factoring is similar to receiving money from credit card companies. When a business accepts a credit card, the credit card company pays for the invoice almost immediately after the company has submitted for payment. A reserve is held but an advance based on a certain percentage is sent out almost immediately after the invoice has been submitted to the factor. In both cases, a discount fee is charged. However, factoring includes only business to business or business to government but not business to consumers.
A typical scenario is that a business delivers a product or service to a client. The business sends an invoice to the client and submits for an advance from the factor. Almost immediately, the factor advances eighty percent of the amount of the invoice. Then when the client pays the invoice, the factor advances the other twenty percent minus a discount fee. Therefore, another difference between accepting credit cards and factoring is that the factor holds out a reserve until the invoice has been paid.
In order for underwriters to determine if the clients of a business have adequate credit for their invoices to be factored, the underwriters have to determine the creditworthiness of their clients. Application for factoring is a very simple process. Initially, a business needs to submit an aging account receivable and accounts payable report. The factor will accept with a proposal including the details involving the terms of factoring if the clients are creditworthy. Factors are very quick at underwriting and not dragging the application process out for weeks or months.It's is very quick and almost painless process.
Once approved for factoring, the business can initially submit for outstanding invoices.
The funds are not restricted. There are no restrictions on how the cash can be used in the business. It can be used for anything deemed necessary in the business. The process of factoring is the same as selling assets. Therefore, factoring is not listed on the balance sheet as a debt.
A business requiring the purchase of materials can often get early pay discounts by paying cash or remittance within a short time after being invoiced for the materials. Conversely, if the business has had to offer early pay discount incentive to clients, the offer can be discontinued and thus offset some or all of the cost of factoring.
It is quite common for a business to have spikes in business activity at certain times of the year. There is flexibility in factoring as the company can determine when to factor invoices. A company can factor the invoices one month and not the next.
Also, a business doesn't have to factor all invoices. Furthermore, the invoices don't have to be submitted for an advance from the factor immediately after the invoice has been created. For example, if a business is able to carry the account for thirty days, it is possible to delay the submission for an advance for thirty days. Factoring is a "needs based" process. Factoring is effective if the financial officer is able to keep track and manage the cash flow.
Factoring should be considered a transitional and time sensitive alternative. Once a company is able to get less expensive conventional financing, it is more cost effective in most cases. Factoring should be a means to have funds available to grow and meet operational needs until it can qualify for conventional loans. It is interesting that some very successful Fortune-500 businesses have used invoice and purchase factoring as a means to improving their cash flow until they were able to set up conventional financing.
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