Facts About Factoring Companies: Increase Cash Flow Without Borrowing
Factoring Companies help to offer relief for one of the main reasons businesses fail – poor cash flow. Even successful businesses, at one time or another, have experienced cash flow problems.
Conventional wisdom dictates that you must borrow money to inject cash a business. Don’t be fooled — banks are not the only places you can get funding. Factoring companies provide an available solution in which a business would not have to incur debt.
Simply, factoring is the process of selling accounts receivable to an investor rather than waiting to collect the money from the customer.
Factoring Companies have the financial backbone of many of America’s most successful businesses. Ironically, invoice factoring is seldom taught in business schools, is rarely mentioned in business plans and is relatively unknown to the majority of American business owners. Yet it is a financial process that enables thousands of businesses to prosper and grow and frees up billions of dollars each year.
Interestingly, factoring has been around in many forms for thousands of years. Factoring companies are private investors who pay cash for the right to receive the future payments on unpaid invoices. An unpaid receivable (invoice) has value. It is a debt your customer owes to your company and agrees to pay in the near future.
The Principles of Factoring
Although factoring companies deal exclusively with business-to-business transactions, a large percentage of the retail businesses use a form of factoring that is familiar to us all. MasterCard, Visa, and American Express all use a form of factoring in many retail transactions. In fact, these large consumer finance companies could be considered large factors of consumer paper.
Here’s an example: You make a purchase at the store and charge it to your credit card. The store gets paid almost immediately from the credit card company, even though you do not make payment until 30 day later or more. For this service, the credit card company charges the store a fee (usually two to four percent of the sale).
The Benefits Factoring can offer many benefits to cash-starved companies. Rather than waiting 30 to 90 days or longer for payment on a product or service that has already been delivered, a business can factor (sell) its receivables for immediate cash at a small discount off the amount of the invoice. Payroll, marketing, equipment and working capital are just a few of the business needs that can be met with this instant cash.
Factoring invoices provides cash flow for a manufacturer to replenish inventory and make more products to sell. There is no need to wait for earlier sales to be paid. Factoring is not just tool for manufacturers to manage cash since almost any type of commercial business can benefit from factoring.
Typically, most businesses that extend credit will have 10 to 20 percent of their annual sales tied up in accounts receivable at any given time. The fact is that you cannot pay utility bills or this week’s payroll with a customer’s invoice, but you can sell that invoice for cash in order to meet those obligations. Factoring receivables is a simple and fast process. The factoring company buys the invoice at a discount, usually a few percentage off the face value of the invoice.
The Costs of Using Factoring Companies
Savvy entrepreneurs consider the factoring discount a small cost of doing business. A four-percent discount for a 30-day invoice is common. Compared with the problem of having enough cash to operate, a four-percent discount is negligible.
Look at it this way: There is little difference between a prompt pay discount offered by many companies for invoices paid within terms, and the factoring company’s discount fee. Business owners consider the discount the same way they treat a discounted sales price: It is simply the cost of generating cash flow, much like offering discounts on merchandise is the cost of generating sales.
Receivable factoring is a cash flow tool used by a variety of businesses, not just the small or the struggling. Many companies use factoring to reduce the overhead of their own accounting department. Others use factoring companies to generate cash-flow, that can be immediately put to work to expand marketing efforts or increase production.
Why Are Factoring Companies Popular for Start-Ups
Factoring companies can be especially appealing to young and rapidly growing companies. Since using the invoice factoring process shortens the business cash-flow cycle, many businesses can get up-and-running faster. Virtually eliminating the wait for invoices to be paid, factoring provides immediate cash flow to allow the start-up to rapidly expand services or manufacture more products to sell. Even when you consider the factoring company’s discount, these businesses usually net much more profit with factoring than without.
Call us toll free at (877) 960-1818 or contact us today to find out how easy it is to set up a Charter Capital FactorLine. One of our account representatives will be happy to assist you.