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Why Factor?

Written by: Rick McCoo

Article Overview: Because this service has not been available, until recently, to small and medium sized companies, businesses should see this a positive ability to secure receivables financing, not as a problem with cash flow.

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Why Factor?

Why Factor?

Factoring, or Receivables Financing is most often used for growth. Only very large corporations once used receivables financing and just the largest banks and financial institutions in the world provided the service. Until recently, only companies generating at least a million dollars of sales each month could qualify for this service. Because this service has not been available, until recently, to small and medium sized companies, businesses should see this a positive ability to secure receivables financing, not as a problem with cash flow.

Companies like Shell Oil, Georgia-Pacific, and IBM, to name just a few well-known companies, factor many millions of dollars each year. Certainly, we don't view these companies as having "problems." Factoring is most often used to expand and take on larger projects; not just for cash flow or payroll. It is a sign of growth.

Many companies already deal with Factors but do not know it. Often, invoices directing payment to a P.O. Box is actually to a Factor. It may be surprising to learn that many businesses have already been exposed to Receivables Financing.

How it works

As invoices are paid to the business by a Factor, 15% to 35% of the total amount the invoice is held in a "reserve". This reserve is paid to the business after deducting the factoring fee as soon as their client pays the invoice and the funds from the invoice payment clear the bank.

The usual fees are 3 to 5 points for each 30-day period with smaller increments in successive months. The fee schedule reflects the industry conditions, the size of the advance and the credit-worthiness of the customer to whom the invoice was issued. Lower fees are available for higher volume commitments, shorter time periods and smaller advances.

Although some say that it looks like a 5% fee is 60% it is not (12 months x 5% or 60% a year.) For example:

Borrow $100,000 from a bank at 7%, interest is $7,000 for a year plus any bank fees. The loan for $100,000 is still outstanding and due to lender.

Factor $100,000 a month with 5% fee. One-year fees are $60,000. However, total amount of funds loaned is $1,200,000 (12 months X $100,000) and the fee is still only 5% and there is no outstanding debt. If a loan for $1,200,000 at 7% were taken out, interest would have been $84,000 with the $1,200,000 principle still outstanding. (7% simple interest & 5% fee are used for example only. All fees and rates subject to current market conditions.)

With each transaction, whether an advance or a collection, you receive an account statement detailing all invoices, checks received, fees, aging and the funds to be disbursed. These statements are faxed to the business at the end of the business day so they are always aware of any account activity.

The word "Factoring" is not used anywhere that the business' customers would see it. It is referred to as a "Credit Line" and a letter of introduction and explanation can be on the business' letterhead. If desired, the service can be discussed with the customers before starting the service.

A credit line can be used much like a chequebook by managing the cash flow on a weekly basis. Funds can be drawn as needed and as often as needed. If the maximum advance is 75% of the invoice but only 35% is needed, then the fees will be prorated exactly half of what they would have been had the full advance been taken.

If cash is readily available to a business, they can take advantage of purchase discounts offered by their vendors and suppliers. Many clients extract extra discounts by offering to pay C.O.D. Also, sometimes a business can make a slight increase in prices and also take advantage of purchase discounts. If they do that, it can then sometimes offset any factoring fees paid and provide virtually free use of the money.

There is no minimum monthly volume and no Term Contracts. The service can be stopped any time the service is no longer needed or if they are not pleased with the service. Burden of service is on the factor.

The relationship is non-binding. If a customer objects, funding can be stopped at any time. All of the business' receivables or all of the receivables from one client do not have to be funded.

Receivables Financing is most often used for growth and communications with the business' customers mention only rapid growth or expansion as the reason for using the service.

Summary

Any negative perceptions should not prevent a business from using this valuable cash flow tool. In reality, Receivable Financing is an established and powerful financial tool that has been a part of the banking industry for hundreds of years.

To start taking advantage of this valuable business tool, contact FBI NOW! Within a week, you could be taking advantage of YOUR valuable cash asset.

This document is for information only and subject to the terms and conditions in effect at the time the application for factoring is submitted for approval.

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Article Tags: 12 months, banks, cash flow, credit worthiness, dollars each year, financial institutions, georgia pacific, increments, invoice payment, invoices, large corporations, medium sized companies, million dollars, payroll, receivables financing, shell oil, time periods, volume commitments

About the Author: Rick McCoo
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Many businesses would benefit from a suite of specific commercial non-bank finance products, each of which performs a different and essential financing function yet work together harmoniously. Frequently, businesses end up with an unplanned hodge-podge of different financing products for different purposes, but the different products work against each other. This is wasteful of time and opportunity. FBI can do for a small and medium size enterprise (SME) what the conductor does for the orchestra; bring together differing elements and have them work together.

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