WHY DO BUSINESSES FACTOR?
CPAs have been scratching their head at this one for some time, because it is “darn expensive” compared to a line of credit. Well, let me tell you it is so EASY. I have been asking my customers this question for years, “If your receivables turned into cash tomorrow, what would you do with the money?” Here are the TOP TEN answers I have compiled.
1. Quick Growth.
Businesses can use the instant cash derived from factoring to generate growth or hire another salesperson to bring in more business. A business could buy advertising to reach new customer or perhaps purchase a piece of equipment which will accelerate production or maybe add new product lines to the inventory.
2. Quick Financing.
Factoring is a fast and easy way to get cash for companies that need working capital for growth. Some companies have a limited track record or they may be start-up businesses which just don’t meet the lending criteria of traditional banks. From start to finish, the average approval time for factoring is about three days, and setup at with a factor is under two weeks. When a business needs cash, they need it now.
3. Cash Flow without Debt.
Factoring does not require additional collateral. A business only has to pledge receivables. Unlike traditional bank loans, factoring does not require you to risk your home or other property as collateral. Since factoring is not a loan it does not add to the liabilities on your balance sheet. That means no monthly loan payments and a clean balance sheet! In fact the receivables turn into cash and cash is then added to the asset side of the balance sheet. A business looks stronger, and factors report to credit agencies on positive trends, so it helps boost credit ratings.
And, factoring companies will not dictate how you spend the funds. There are no requirements to buy equipment or other assets. There are situations, however when facing outstanding judgments or tax obligations, a factoring company will want these obligations paid from the proceeds of the first funding.
4. Flexible Terms.
There are no long term contracts, minimums, or maximums with many of today’s factoring programs. There are no monthly loan payments or obligations like a line of credit. Some factoring companies will let you pick and choose how often and which invoices you factor. Factoring is designed to grow with the business so as sales increase your access to cash grows. Factoring companies have varying terms for you to consider so shop around and find the right factor for you and your business.
5. Extend Terms to Customers.
Confidence is created when a business can “credit-approve” a customer with the benefit of a factor behind them. Because a factoring company will help underwrite the debtors/customers and their ability to pay, some offering non recourse or credit insurance, business owners avoid extending terms to high-risk candidates. As credit terms are offered, a business can take on more sales without hurting cash flow. Go ahead, give customers 60 days to pay to win the sale, and pass the “wait” off to the factor.
6. Professional Receivables Management.
Businesses tend to hire a Receivables/Payables employee for as little as $10 plus per hour, dismissing this job as important! (Until they are not getting the money fast enough.) When a factor assumes the management of the receivables, it helps with collections, billing concerns, reaching the payables gate-keeper, answering credit questions on debtors, and keeping a business on track to grow. This is now an absorbed expense that is paid as part of the factoring fee, and should be considered when cost justifying the rates. Also, factors understand what paperwork is necessary to keep up to date with the state, so they stay on top of those requirements making a factor a solid business partner.
7. More Funding with Higher Advances.
With factoring, a business can qualify for more funding. Factoring firms will typically give a cash advance of 80% to 95% of your receivables. That is traditionally more than you would get from a bank, especially if your business is young, in fast paced growth, or exiting a bank relationship because it is in a turnaround situation.
The cost of factoring invoices has come down over the years with fees as low as 1.5% for 30 days. The fees vary by industry, volume and number of invoices, advance rates, customer creditworthiness, and how long it takes customers to pay.
8. Increase the Bottom Line Revenue.
It is easy to grow a business when cash is not an issue, and business growth equates to more money for the bottom line. Many companies use factoring to increase profits or fund growth. Businesses can negotiate vendor discounts and pay bills on time—even ahead of time, building vendor confidence. Once vendors realize how quickly they are being paid, they will be more willing to offer better terms or even cash discounts. With factoring a business can even positively impact credit ratings. The business will realize profits far in excess of the cost of factoring.
9. Strong Financials Not Required.
A business and its owners will not need impressive personal or business credit. Traditionally, there cannot be personal or business judgments, tax liens, or child support issues if you want factoring to work for you. Years in business will not matter, so start-up businesses can qualify with the very first invoice. A factor looks at the future of your business, not the past, to determine whether you qualify. The factoring company looks to the strength of the customers paying on the invoices, rather than the business. A bank may offer a line of credit, but that is usually if a business has been around for at least 3 years, showing no losses. An SBA loan, which is still just a bank loan with an SBA guarantee is an option as well, but both will require collateral from the business owners.
10. Peace of Mind.
Many business owners wait for the mailman so they can receive and deposit incoming checks quickly. And they cringe when a banker calls about overdrafts. Sound familiar? A business owner can meet financial obligations and enjoy life apart from the business – no more waiting on customers to pay the invoices. The business can pay bills, meet payroll, pay for insurance, rent, taxes, etc. All of this stress can be abated with consistent cash flow from factors. Businesses can now concentrate on future sales, not past collections. A business can say “Yes” to the big deals.
Even better, business owners mentioned they get a good night sleep once they fix their cash flow with factoring!
Author- Robinn Mikalic