It is definitely realized that cash flow is one of the main reasons why businesses fail. Every business at one time or another , even the successful ones, have experienced problems with cash flow . You need to know that cash flow does not have to be a problem any longer . Do not be fooled – you do not have to rely strictly on banks to get funding. There are other viable solutions available and there is no need to borrow
What is Factoring?
One solution worth mentioning is known as factoring. Factoring is the process of selling accounts receivable to an outside investor rather than waiting on collecting money from the customer.
Factoring is known to have a very ironic distinction: It is currently being used as the financial backbone of many of America’s most successful businesses. Why is this found to be ironic? Because factoring is not really taught in business colleges, is seldom mentioned in business plans and is relatively unknown to the majority of the American business community . Yet it is seen as an financial process that frees up billions of dollars every year, enabling thousands of organizations to grow and prosper.
Factoring has been in existence for thousands of years. Factors are really investors who are paying cash for the privilege of being able to receive future payments on your invoices.
Any unpaid receivable or invoice has monetary value. It is considered to be a debt your customer has agreed to make payment for in the very near future .
Although factoring involves exclusively with business-to-business transactions, a large percentage of the retail business community utilizes a factoring principal. All the major credit cards MasterCard, Visa, and American Express use a type 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.
Just give this some thought: You make a routine purchase at Sears and it is charged to your credit card . The retailer gets paid almost immediately, although you do not make any payment until you choose to do so. For having this convenience , the retailer is then charged a fee by the credit card company (typical fees range from two to four percent of the sale).
Factoring provides many benefits to cash-starved companies. Not wanting to wait 30, 60, 90 days or more for payment on a product or service that has already been delivered, a business can now choose to factor (sell) its receivables for cash. This is processed by taking a small discount off the amount of the invoice.
Many business needs are met with this cash stream .Payroll, marketing efforts, and working capital are just a few . Factoring can now provide the means for instant cash flow a manufacturer needs to replace inventory and make more products to sell: A business no longer needs to wait for earlier sales to be paid. Factoring is not just a cash management tool strictly used by manufacturers: Almost any type of business can see huge benefits from factoring.
In general , a business that extends credit will have 10 to 20 percent of its annual revenue committed to accounts receivable at any given time. Just think for a moment about how all the cash that is tied up in 60 days' worth of invoices: You surely cannot pay the power bill or this week's payroll with a customer's invoice, but you can definitely sell that invoice for the cash needed to pay these obligations.
Factoring is a very fast and simple process. The factor purchases the invoice at a discount, usually a few percentage points less than the actual face value of the invoice.
People usually consider this discount a relatively small cost of doing business. A four-percent discount for a 30-day invoice is common-place . When looking at the problem of not having cash when you need it to operate, the four-percent discount is negligible. Just look at the factor's discount as though your business had offered the client a discount for paying cash. It works pretty much the same.
Companies view the discount the same way they handle a sales price: It is simply defined as the cost of generating cash flow, much like discounting merchandise is the cost of generating sales.
Factoring is known as a cash flow tool used by a multitude of businesses, and is not just confined to those which are small or struggling. Many companies utilize factoring to minimize the overhead of their own accounting department. Others use factoring to create cash, which can be used to expand marketing efforts and enhance production.
Factoring especially appeals to startup companies that are also growing rapidly. Since the business cycle, is shortened by this process, businesses can grow much faster. The ability to manufacture more products for sale while waiting for invoices to be paid is largely eliminated. Businesses such as these usually create much more profit with factoring than without, even when discounts are included.
So, the question here is why not simply go over to your friendly banker for a loan to ease the cash flow problems? A loan can be very difficult if not impossible to receive, especially for a new start-up high-growth operation, because bankers have very strict lending restrictions. The relationships between businesses and their bankers are not as strong or as dependable as in previous years.
The consequences of a loan is much more different than that of the factoring transaction for a business. A loan places a debt obligation on your company’s balance sheet, which costs you interest. In contrast, factoring places money in the bank without the creation of any long term financial obligation. Usually , the factoring discount will be much lower than the current loan interest rate.
Loans are usually dependent on the borrower's financial stability, whereas factoring is more focused in the soundness of the business customers and not the client's business itself. This proves to be a real benefit for new businesses who are not really yet established .
There are many scenarios where factoring can help a business meet its cash flow obligations . It provides a reliable resource of operating capital without incurring any debt. This can result in growth opportunities that dramatically increase the bottom line. Practically any business can benefit from factoring as part of its overall operating policy.
Every sound businessperson must comprehend the concept and benefits of factoring in order to operate as profitably as possible.
Hope your business can benefit from the Factoring Concept
