|
|
Using Your
Receivables to Grow Your Business
|
|
|
· Factoring to Grow Your Business * * * * * * * * * |
Every time you extend credit, or
terms, to a customer, you become the customer's banker. You are
lending to your customer, interest-free, for however long it takes them to
pay. The impact can be critical
to your business: ·
You
can't take advantage of purchase discounts from your vendors. ·
You
may be forced to walk away from new business with good payers. A growing business
often has opportunities without the cash flow to meet them. Every
business that has A/R has the choice of financing its customers from its own
resources or using outside sources.
There are no other choices.
Factoring may be the outside source for you. Factoring is mostly for growing
businesses that need cash flow to allow them to take advantage of
opportunities. Factoring gets
much to most of each invoice into your account a day or two after you submit
it (amount depends on your industry, size of invoices, who your customers
are, etc.). Factoring is even
available to companies that have receivables totaling only a few thousand
dollars each month. Imagine having all the working capital you need! How much could you grow your business? Your customers already deal with
factors. Sometimes they know,
sometimes they don't, but it won't be a new experience for them. In fact, if they even notice, they are
likely to have more confidence in you because they see you taking steps to
grow your business. In any case,
probably the only person who will know will be the factor's point of contact
who verifies that invoices have been received and are valid. What are the basics of factoring? ·
Our
client (you) submits an invoice to an approved customer and to the factor at
the same time. ·
The
factor may confirm product/service receipt with customer (avoiding later
issues). ·
The
factor transfers about 80% of the invoice to your account. ·
The
factor receives the payment. ·
The
factor pays you the remainder minus its fee. ·
Depending
on your size and needs, your A/R department may become a monthly Quickbooks download. What businesses factor? Any
business that has to wait for its receivables is a candidate. They usually have to pay their
employees this week but don’t get paid until next month. Some typical examples include: ·
Staffing
agencies. ·
Service
firms. ·
Consultants.
·
Construction
subcontractors. ·
Trucking
companies. ·
Manufacturers
(they might be able to finance some of their materials through purchase order
financing). ·
Auto
body shops (insurance work). ·
Leveraged
buyouts when the acquired company has substantial outstanding receivables
which can be sold at closing. Any company that might have to pass on a new opportunity due to
lack of cash flow should factor. (Note
that only commercial, institutional, and government accounts may be
factored. Individual and
residential accounts can’t.
However, if your business is involves home improvements or something
similar, we can arrange a consumer financing
program for you.) The factor doesn't
care about your credit, only about your customers' credit. Factoring is not a loan, and it is not
dependent upon, nor does it affect, your company's credit. You don't need
collateral, and there is no lien on your property (but there is a lien on
your receivables). Since you
aren't borrowing money, no debts will appear on your balance sheet or credit
report. The factor pre-screens
your customers for credit-worthiness, so you’re protected from wasting
your efforts on a deadbeat client.
Because the invoice is usually sold non-recourse, if your customer
can't pay, it's not your problem.
(If the customer refuses to pay until you fix a problem,
that is your problem.) The factor receives and processes
the payments. They gently and
professionally remind – in your name - clients whose payments are
late. All your A/R department has
to do is receive a monthly activity report and confirm its contents. You might not even need an A/R
department if you outsource to the factor. If you are your own A/R department,
wouldn’t you like to focus on serving your customers, not collecting
from them? Yes, there is a cost to
factoring. Factors remind your customer for you. They spot-check quality at delivery,
so problems don’t fester.
They provide reports you can’t produce. Factors let you do what
you do well, while they handle the receivables. It's a cost of doing business that
pays for itself with a high ROI and helps you grow your business. For a discussion of the logistics of
factoring, including getting started, click here. Also take a look at cash flow solutions other than factoring. Can
you afford not to factor? |
