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Here's the skinny on Invoice Factoring

Written by: Joe Cooper

Article Overview: Most small or start-up businesses cannot rely on loan financing alone, invoice factoring allows the entrepreneur to keep the cash flow going to keep a business afloat.

Here's the skinny on Invoice Factoring

Most small or start-up businesses cannot rely on loan financing. They are often turned down by banks for not having established credit or have poor credit, and do not have other means of financing to rely on. These businesses face a greater challenge than established companies to:

• Meet payroll
• Pay suppliers on time
• Invest for growth
• Smooth out seasonal cashflow needs
• Survive

In short, Factoring is the process of selling your receivables for cash. It is the service of exchanging the interest in your accounts receivables or invoices to a funding source at a nominal discount, and is used to improve liquidity of businesses. Sometimes factoring is called "account receivable financing" or “advanced funding of receivables.” Invoice Factoring is a service that has been in practice since the dawn of commerce. Today, factoring provides over 100 billion dollars of funds to industry each year and is an increasingly popular solution to improving cash flow of businesses of all sizes including multi-billion dollar corporations. With work of creative financiers, factoring is now easily accessible to smaller sized businesses to which banks are reluctant to lend funds. Factoring is filling a tremendous void that banks have created.

Invoice Factoring can improve the liquidity of your business. Companies often can't afford to have cash tied up in receivables 30-45 days, an average period for many companies to collect their receivables. They need the cash to meet immediate present financial demands of their business. Unfortunately, most companies cannot turn to banks since banks often have restrictive lending requirements related to cash flow, profitability, equity, and years in business which prohibit them from making loans.

Two-ten-net-thirty, or whatever the terms are, companies are more than willing to discount their prices in order to have cash NOW. To be paid now by your customers, how much would you be willing to discount your prices? 2%, 3%, 5%, 10%?

Factoring is a cost-effective and timely service that helps companies speed up their cash flow, thereby enabling it to more readily pay its current obligations and grow. Advanced funding of account receivable enables these companies to convert their invoices into instant cash. Factoring can help companies to:

• Stay current with its vendors, payroll and taxes.
• Go after bigger sales
• Take advantage of vendor discounts
• Smooth out seasonal demands for cash
• Invest for growth in a timely basis
• Survive

When you factor, you do not incur any debt, and there are no monthly payments. You control your cash flow by determining how much to factor, and when.

Invoice factoring is fast, easy to set up, and easy to terminate. After a short due diligence period, an account is set up and the company forwards invoices to the funding source, representing money due from its customers. Then, the funding source advances, via wire transfer, a significant portion of the face value of an invoice and retain the remainder as a reserve. Once the funding source is paid on the invoices, the transaction is complete, and the funding source will release the reserved amount of the invoice, minus the predetermined financing fee for advancing the cash.

From a financier’s standpoint, the decision to purchase invoices is influenced by the quality of your customer base and their performance as opposed to your years in business or financial strength. If you have good, reliable customers, as you should, you represent a viable factoring candidate.

Factoring fees vary from company to company. They are also competitive with bank financing. Unlike bank financing, however, factoring fees are determined, not by the companies’ creditworthiness, but by a combination of the creditworthiness of your customer, average payment cycle, invoice size and factoring volume. The fees can be as low as 2% of the invoice amount, depending on the level of risk involved.

You have control and decide which invoices you need to sell to manage your cash flow needs. You can factor your invoices daily, weekly, monthly, or seasonally.
You qualify if any of these apply to you:
• If you are a young company with credit worthy customers but lack the financial track record required by traditional lenders.
• Your business is doing well, but to take advantage of new sales and profit opportunities you need more cash flow.
• Your business might have income or credit problems and tax problems.
• If your company has operating losses or have already filed for bankruptcy protection.
• Your business is growing rapidly and you need capital to fill orders or services, but have too much money tied up in accounts receivable.
• Your business is positioned to increase your current volume of business but do not want to incur any debt or increase overhead.
Further, your accounts receivable may not be pledged as collateral for a loan, a company may qualify if the bank can exclude certain accounts receivable from the list of pledged collateral.

Quick facts about Invoice factoring
• Factoring or advanced funding of receivables is the process of selling invoices to a funding source to receive money owed by customers far in advance of the customary 30 to 45 days.
• Invoice Factoring has been in practice for decades by the most prominent corporations, and has recently become easily accessible to smaller businesses.
• Factoring is a cost-effective and timely solution to quickly improving cashflow of growing companies.
• After a short due diligence period, funding sources advance a significant portion of the face value of invoices, retaining the remainder as reserve.
• After the invoice is collected the reserve is released less nominal discount for the funding source.
• Fees are determined mainly by the creditworthiness of the companies’ customer base, NOT by those of the companies themselves.
• Each invoice handled independently. You determine what invoice to factor, how much, and when.
Fortunately, banks are not the only source of working capital. Money can be obtained quickly through accounts receivable factoring through small business lenders where an ongoing line of capital can easily be established. Factoring also goes hand in hand with your financial planning, giving you some predictability in your month-to-month financial situations.

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