What A Factor Looks For To Finance Invoices And/or Purchase Orders
Factoring invoices and/or purchase orders should be a prime consideration when a
company has cash flow problems due to extending net-30 days to other businesses or to the government.
The outlook of potential in the future is the reason for a business to consider struggling through difficult cash flow issues. A factor usually only needs to have a copy of a company's aging accounts receivable and accounts payable to determine eligibility and interest in financing accounts receivable. It is possible to finance purchase orders and/or invoices when a factor can see the potential for future growth.
Cash flow problems needing to be fixed with an immediate infusion of cash is the purpose of factoring invoices. It is a standard practice for a factor to advance eighty percent of an invoice within 24-36 hours after the invoice being submitted. The factor retains the twenty-percent reserve until the invoice has been paid in full. Then the factor advances the reserve minus a discount.
Some Fortune-500 companies have used factoring at various stages of development. The company should consider factoring as a temporary way to finance the company out of a cash flow crunch until being able to qualify for conventional loans. Factoring provides some peace of mind due to the fact it is not a loan and does not require periodic payments or renewals.
Once a company is set up for factoring invoices, the amount eligible for factoring grows or increases as the volume of company invoices grows. This peace of mind allows the company to specialize in doing what they do best rather than wasting valuable time waiting for an answer from a conventional loan source.
Submission of a company's accounts receivable and accounts payable will usually get an answer and possibly a proposal within 48 hours. A minimum of paper work will be required after a proposal has been made. After the paper work has been submitted, the factor will usually send the first check within 8-10 days.
On the original submission of invoices to a factor, the factor will fund outstanding invoices. Thereafter, only new invoices will be funded. Delayed submissions of invoices to factors is acceptable by most factors when a company has the ability to finance smaller invoices or even larger invoices for a period of time. When a company can finance smaller invoices but needs factoring on larger invoices, factors are also willing to work with them by not requiring all of the company invoices to be factored. So there is a lot of flexibility in factoring.
Who should companies contact in order to find a factor? There are brokers who can find the right factor for any particular industry. Some factors will only factor one particular type of account such as medical. Others specialize in construction. Yet others will factor just about anything as long as they are familiar with that particular industry. A company's clients should be creditworthy in order for a factor to consider financing the invoices sent to that client.
For companies that have received purchase orders and need financing to fill the orders, factoring is a viable alternative. Many small companies don't have the clout with banks in order to finance large orders. It is a "good news/bad news scenario. It' s great to have large orders but nightmare from you know where to not be able to finance the business operations and materials in order to meet the requirements of the order. The lack of consideration to using alternative financing has cost many companies a lot of money.
When companies buy equipment, they should also consider leasing as a way to keep a positive cash flow. Often, leasing has tax advantages. Check with your accountant to see if there are tax advantages to leasing Even if it is more expensive to lease,and without tax advantages, it might be in the best interest of the business in order to maintain a positive cash flow.
A business can grow and flourish only when it has a positive cash flow. The whole purpose of leasing or factoring is to take care of temporary cash flow infusion needs.
by: Russell Wardle
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