The truly great Recession and resulting credit crunch has caused banks to reduce access to loans and rescind lines of credit. These results are still being felt today. In order to compound the problem, many companies discover that their suppliers are demanding payment sooner while their customers take longer to pay on invoices. However they are expected to make payroll, pay out taxes and meet expenses TODAY!
In this perfect storm of economic turbulence, how do you survive?
The answer might lie in a funding service utilized by Fortune 500 companies but that, oddly, is relatively unknown in the small and medium size business market. The method is a highly effective process called “factoring. ”
What is Factoring?
“Factoring” is a financial tool for company that provides access to working capital without adding debt.
Factoring, by definition, is the process of selling commercial accounts receivable at a discount. It allows a business to extend payment terms of thirty or more days to its customers without having to wait that long to receive its cash. It stabilizes income and provides the working capital to start the business of doing business. The program is straight forward, cost effective, easy to apply and tax deductible.
Depending on the situations, factoring may be the ideal financial tool.
How does the process work?
Companies along with B2B transactions are candidates for factoring. Once product or service has been shipped and invoiced, the invoice could be sold for cash. The majority of the invoice worth is transferred at the time of sale. The factoring company will interact with the particular recipient of the product or service to have them remit payment directly to all of them. Once payment is received, they will deposit the balance of the invoice worth (less the fee) into your bank.
Not every company qualifies for the assistance, but the probability of qualification is much higher than other financing options (such as a bank loan).
The reason involves the three-way relationship of invoice discounting services. There are three parties within a factoring relationship: you, your customers and the factoring company. Where a bank will scrutinize your credit just before providing a loan, factors scrutinize your customer’s credit because they are the celebration responsible for honoring the invoice. The particular underwriting criteria are different, and in several ways, more liberal than those of the bank.
Top-tier invoice discounting companies also provide two other beneficial services to their clients – credit score assessment of prospective customers and receivables management. In essence, they become your own outsourced A/R Department.
Here’s exactly why that’s important: In small and medium size businesses, the stress to accept a prospective customer, simply because they wish to buy, is very strong. However , doing business with a poor credit risk company can seriously endanger a business. A factoring company helps minimize that will risk by performing credit assessments on each of your prospective customers.
Moreover, by managing the accounts receivable process, they work with your customers to make sure that everything about the transaction is in order. They handle receipt of payment and depositing of funds.
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Having the factoring company do this work means you do not have to hire someone to handle those people functions.
Is Factoring Right for Your company?
Factoring has been an integral part of growing companies for centuries. It was a major component of the economic growth of the American colonies in the seventeenth and eighteenth generations and is often used by today’s mega-corporations.
As a financial tool, factoring is frequently used a) by early stage companies, b) in times of rapid corporation growth or, c) in times of financial stress. For early stage businesses and during rapid growth the demand for cash is often much greater than the cash on hand. In times of financial stress credit is tight and customers take longer to pay.
These are facts of the business cycle. The advisable business owner will recognize the reality plus take action to navigate his or her corporation through turbulent economic waters.