Cash Flow Concerns? Consider Factoring
Small business owners have many concerns: competing with the big guys, looking for new business, hiring good help, and, of course, maintaining cash flow.
While it doesn't take a crystal ball, effective cash flow administration requires knowledge and management of your production versus your expenses. This may require some creative or out-of-the-box thinking to discover ways you can lessen your overhead and increase productivity. It's certainly easier said than done, but it's necessary to do if you'd rather focus more on growing your business than on worrying about keeping it afloat.
There is, however, another alternative: factoring. You may have heard the old business owner's lament: "You can do a beautiful job on time, but it doesn't always mean you're going to get paid on time." If you're a business owner and you always have work, but the money is still in your clients' pockets and you don't want to pressure them—and possibly lose their future business—factoring can help!
Any business with accounts receivable is a candidate for factoring. Instead of waiting 30, 60, or even 90 days for invoices to be paid, a business can sell those unpaid invoices to a factoring firm, which advances payment of 65 or 75 cents for each invoiced dollar.
The business then has immediate cash for operation, without incurring debt. The balance due is held back in a reserve account. Once the factoring firm collects full payment from the client's customer, the reserve is returned to the business, minus a small service fee.
A factoring firm, or factor, can respond much more quickly than most banks. When an application is submitted, it takes about seven to ten days to fund the first set of invoices. Once a relationship is established with a factoring firm, it usually takes 24 hours to fund invoices.
Because the factor is not making a loan, the size of the business and its credit history are not important. The factor will, however, analyze the credit of the customers who will pay the invoices, as well as verify in writing that the invoices are indeed due, and that the goods were received and accepted, work was completed and accepted, or a service was rendered satisfactorily.
This valuable credit analysis can be a huge bonus to any business that is large enough to extend credit to its customers, but not large enough to have its own credit department to assess risk. Some businesses ask their factor to handle their entire customer invoicing. By outsourcing this task, the client will have immediate access to all invoiced funds. In addition, they are freed from administrative hassles as well as the need for collection services.
Factoring used to be seen as a last resort for companies in financial trouble. Today, smart businesses use it like a line of credit to manage financial bumps and to take advantage of growth opportunities without going into debt. Additionally, a factor may be able to give a client more money than a bank can, because factors don't take their clients' credit-worthiness into consideration. Rather, they depend strictly and solely on the credit-worthiness of their clients' customers. Factoring is a win-win situation for both new and expanding businesses, as well as those that are "unbankable" or need more money than the banks are willing or able to give them.