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Factoring Financing: How to grow your business without debt or loans

by: Marco Terry

What is factoring?

Accounts receivable financing, also known as factoring, is a powerful financial tool that has fueled the growth and success of a number of companies.

Factoring enables companies to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies

immediately get paid for their invoiced work from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring

strengthens a business' cash position by shortening the time to get invoices paid to 48 hours and providing the needed funds to meet current expenses and

target new opportunities.

Factoring Benefits

As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factoring relies more heavily on the

financial strength of the clients' customer. This is a critical feature,since many new and small businesses do not meet the financial criteria of traditional

lending institutions. However, many small businesses have a roster of financially strong customers that can be leveraged. Factoring empowers businesses to

capitalize on their customer list, and provides them with a tool to transform outstanding receivables into immediate cash, without generating debt. Since

Factoring is not a loan, it is an ideal financial product for the following:

o New and emerging businesses including small and home businesses, consultants and solo-preneurs.
o Businesses with financially strong customers
o Businesses that are preparing to grow significantly
o Business with intangible assets (e.g. consultants)
o Businesses that do not want to take a loan

An additional benefit of factoring is that the factor usually assumes part of the clients' credit risk for the customer. This means that if the customer

becomes financially insolvent due to bankruptcy and does not pay the invoice, the factor will assume the loss. This is a critical service for small companies

who may not be able to afford the bankruptcy of a customer.

Costs

The costs of a factoring transaction - also known as the discount - vary based on a number of variables such as the financial strength of the customer and

the amount being factored. Generally, the discount is a percentage of the invoice's face value that increases with time until the invoice gets paid. Small

businesses, those that have between $20,000 and $300,000 in yearly revenues, can expect to pay a discount rate of about 2% for every ten (10) days that the

invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.

Factoring at Work: Business Services and Products, Inc. Case Study

Business Services and Products, Inc. (BSP, Inc.) is a small fictional company, which provides business consulting and equipment to local companies. It has

$300,000 of annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Although most business owners would be very happy to

manage such a company, Jane Sullivan, BSP Inc's president, is very worried about her company's financial position.

Most of BSP Inc.'s customers are large companies with a good reputation for always paying their invoices. However they always take between 30 to 45 days to

pay them. BSP Inc., however, needs to pay their employees every two weeks and their vendors every four weeks. This discrepancy between the time that

customers pay their bills and the time BSP Inc. needs to pay their employees and vendors has created cash flow problems in the past. Furthermore, these cash

flow problems have already caused Jane to delay payroll twice this year and have placed her trade (vendor) credit in jeopardy multiple times. This has also

caused her to pass on a number of significant business opportunities because she was unsure of the company's financial ability to hire and pay for additional

staffers. Unfortunately, BSP Inc. did not have a large enough financial cushion in the bank to afford paying employees while waiting for 45 days new clients

to pay their invoices.

The following table provides an overview of BSP, Inc's current financial position.

Business Services and Products, Inc (without financing)

Yearly sales: $300,000
Lost new sales opportunities: Unknown
Total Sales: $300,000

Variable Costs (60% of Sales): $180,000
Fixed Costs (Rent, phones, etc): $20,000
Total Costs: $200,000

Profit (Sales - Costs): $100,000

Although the company's prospects appear great, Jane may have to stall her company's growth until she builds a large enough cash cushion at the bank to

finance her company's growth. After careful consideration, Jane decided that a factoring line of working capital could help strengthen her company's

financial position. Furthermore, factoring her invoices would enable BSP Inc. to take on new customers and continue growing, knowing that she could

capitalize on her slow paying customers. BSP Inc.'s financing agreement will provide the company with an advance of 70% of her invoiced services. This means

that the company can get 70% of the face value of the factored invoices within 24 to 48 hours of submitting them to the factor. The remaining 30% of the

funds, less the factoring fees, will be quickly rebated as soon as the customer pays their invoice.This line of working capital strengthened the company's

financial position and bank account, enabling Jane to pay for new employees to service new contracts. Jane also decided to use the extra capital to pay her

vendors early, obtaining quick payment discounts and helping to reduce the cost of factoring.

BSP Inc. customers pay their invoices within 30 days of receipt. The discount (factoring fee) for these invoices is 6%. Every time an invoice is paid, the

factor rebates BSP Inc. the remaining 30% that was not advanced less the factoring fee. This means that once the transaction is completed, the factor rebates

24% (30% - 6%) to BSP Inc. Thanks to the factoring line of working capital, Jane was also to secure an additional $120,000 worth of business, bringing her

annual revenues to $420,000.

The following table shows BSP Inc.'s financial position a year after using factoring.

Business Services and Products (with factoring)

Existing Sales: $300,000
New Sales: $120,000 (factored)
Total Sales: $420,000

Variable Costs (60% of Sales): $252,000
Fixed Costs (Rent, phones, etc.): $20,000
Cost of Factoring (6% of $120,000): $7,200
Total Costs: $279,200

Net Profit (Sales - Costs): $140,800

As can be seen from the above table, factoring helped BSP Inc. increase profits substantially from $100,000 to $140,800 - a 40% increase. It placed BSP Inc.

on a more stable financial footing, priming it for growth. Furthermore, the cost impact of factoring on the bottom line was minimal, as it was easily

absorbed by the additional business, showing that factoring was paid for directly by the growth.

About the author:
About Commercial Capital, LLC and Marco Terry

Commercial Capital, LLC is a leading commercial finance company that specializes in providing working capital through factoring to small businesses. For more information or a free consultation, please visit our web sites at or or call us at (786) 206 4722.

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Business Plans - What Do They Include?
by: Kevin Erickson

Ok... so you've finally reached that stage in the development of your home business to get started. You've done the research, you have a game plan and you're ready to go except for one small detail... you need money. Whether it comes from a loan or from investors it doesn't matter but you need a good dose of seed money to put all your hard work and planning into action. However, regardless of who hears your money pitch before they give you a dime they will want see your business plan.

Business Plan - What Is It?

A good way to think of a business plan is that's it's a document that provide answers to the type of questions anyone who may provide financing would like to know about your home business. You will not get outside funding without one, because the people giving you the funding will insist on one because it helps them to know that you�ve thought through what you�re proposing to do. A business plan says to them... "I�ve considered this from every angle, and here�s what I�ve come up with".

Business Plan - What Does It Include?

What is your product or service? This is the first question every business plan should answer. You must explain in the clear, concise language what in the world you plan to produce or what service you plan to provide. You will also want to include why you've chosen this particular product or service.

Who are Your Customers? After you've explained your product or service, the next step is to identify who you plan to sell your product or service too and why. The demographics (age, sex, language, country, state or city, income, etc.) You need to clearly identify your customers in order to properly target your advertising, packaging, pricing, et.

What Makes You Different? You need to identify the "primary factors" that will make your business different than other businesses you'll be competing with. What niche are you filling that they are not or what do you plan to do to fill a particular void in the market that you've identified?

What are Your Expenses? Your start-up expenses include any equipment that you need before you can get up-and-running, while your day-to-day expenses are staff costs and supplies.

Following is a Simplified Example of Business Plan

This a a simplified and shortened version of a business plan. In the real world... each one of the following sections would be 1 - 2 pages in length. That being said... in most instances it's better to be as brief as possible. Only add information if your potential backers request it. It's a bad idea to go into too much detail in your plan. You�re not trying to explain everything down to the nth detail, just the basics of the business and why they should give you the money you need to launch it. And always focus on profit.

Catering Plus

Nature of Business: The business will be a home-based catering company, producing luxury food for special occasions such as birthdays and weddings. We will provide a comprehensive catering service, while specializing in high end customized cakes, which have a higher profit margin than other foods.

Target Market: Our catering business will be aimed at middle-class customers who desire a top-of-the-line catering but must operate on a budget. Our initial market area will consist of Mytown and the affluent area of Theretown.

Key Factors: We will only use commerical grade ingredients purchased from wholesalers and provide top quality design and service. This will allow us to provide food that looks tastes great, while keeping costs as low as possible.

Expenses: Beause I will be using my kitchen and making the food myself, there are only two real expenses: The purchase of an industrial grade mixer and then the day-to-day cost of supplies. I've attached a suppliers� letter listing prices. Our research has shown that this supplier offers the best value for start-ups.

To wrap it up, you should include a breakdown of both projected profit and loss per month (in graph form)for the first year in business. Show one-time and day-to-day expenses versus projected profit to indicate how you will pay-off your loan. Your business plan should show you making enough of a profit each month to live on � if it doesn�t, then it may be considered unfeasible.

Study a Few Real-World Business Plans

The best way to get a real a feel for the dos and do nots of a business plans is to find real-world plans that have already been approved and study them. A good place to start is the internet. Once you�ve studied a few, you will get a better feel for how much work will be involved in putting your business plan together. Remember, until your business exists for real, the business plan is the only tool you have to sell prospective backers on how great your business is going to be

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