How factoring your invoices can help your business grow
Every day many business owners hit a wall. That wall prevents
them from growing their business, or at least, severely limits
the speed at which they can grow their companies. Sometimes, and
especially for small and mid size businesses, the wall appears
to be insurmountable. That wall is lack of working capital.
Let's take a look at the most common source of working capital
problems: extending payment terms to customers.
There are few things that small business owners hate to hear
more than a customer utter the words, "We'll be happy to do
business with you. However we pay net 45 days". As is well
known, commercial clients like to pay their invoices in 30 to 45
days. As a business owner, you are expected to go through the
trouble and expense of delivering your product or service on
time... only to then wait 30 to 60 days to get paid.
It does not take a long time before the business has a lot of
money tied up in their unpaid invoices - or accounts receivable.
At this point the business may have more money in unpaid
invoices than actual cash in the bank. When they reach the
breaking point, they hit the wall. They can no longer supply new
products until old invoices pay. Sometimes it's even worse. The
business may stop operating until old invoices pay. Payroll is
missed. Key suppliers are not paid. Unless this is fixed
quickly, the business will certainly face major problems. If you
hit the wall, there are two options. Either you step on the
brake and stop growing your business, which means your
competition gets the contracts, or you blast through the wall
using some form of financing. Invoice factoring can help you do
just that.
Your unpaid invoices are an asset - really!
Companies that hit the wall have a great asset that can be
turned into immediate funds. They just don't know it. This asset
is their unpaid invoices from credit worthy clients. Let me give
you an example. Let's say that you have a $10,000 invoice from
General Electric payable in 45 days. Do you think GE will pay?
Isn't that invoice almost as good as money? Well, of course. GE
is arguably one of the best and most financially stable
companies on the planet. Most people would certainly consider
that invoice to be "almost cash". Unfortunately, banks will
seldom provide you any financing that relies on that "almost
cash". However, there is a solution that relies solely on the
power of your unpaid invoices. It is called factoring.
Invoice factoring. Financing your business without debt
Invoice factoring allows you to turn your slow paying invoices
from good customers into immediate cash. It's a very simple
transaction in which you trade an invoice - "almost cash" - for
actual cash. Basically, the factoring company provides financing
solely on the power of your soon to be paid invoices.
Provided that you have good customers, you can repeat this
process for every invoice you have, almost indefinitely. If you
sell products to good credit worthy customers, a factoring
company will gladly buy your invoices. There are no limits,
except how much you can sell.
One important thing to know about factoring is that it doesn't
generate debt. The factor does not loan you money for your
invoices. It buys them outright from you at a small discount.
Since factoring is not a loan, qualifying for it is easy and
your financial statements look cleaner. You just need a well-run
business and great customers.
Who is a good candidate for factoring?
Factoring is a great resource for companies that have great
paying - albeit slow paying - customers. To work well, the
company should have profit margins of at least 15%. However,
higher margins of 25% - 50% are more desirable.
Factoring works well for companies that have hit the wall and
are turning away new business opportunities because of lack of
money. In these instances, factoring will almost always allow
you to grow your company immediately and will more than pay for
itself.
Factoring works well for almost any industry. Some very
successful staffing companies, trucking companies, IT
consultancies, construction firms, manufacturers and service
providers have used factoring to dramatically grow their
businesses.
A sample factoring transaction
Let's take a look at a sample invoice factoring transaction.
This will help you better understand how this financial tool
works. Let's say that you have a company, called Super Services
Inc. Super Services sells products to two clients. The clients
are Company A and Company B. The factoring would look as follows:
1. Super Services delivers its products to Company A and Company
B 2. Super Services sends Company A and Company B an invoice for
its products. At the same time, it sends copies of the invoices
to factor 3. The factoring company receives the invoices and
advances funds to Super Services. Super Services can use the
funds to grow the business 4. The factoring company waits to get
paid. Once it gets paid, the transaction is settled
As you can see, invoice factoring is a fairly straightforward
tool that allows business owners to capitalize on their most
precious asset - their invoices.
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