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 http://www.ccapital.net or http://factoring.qlfs.com or call us at (786) 206 4722.
Bankruptcy… a frightening word with serious connotations. In recent
years governments have been cracking down, making penalties for bankruptcy
more severe in an attempt to make them more difficult to attain so that
only those in serious need can apply for them.
Despite the negative image that is associated with bankruptcy and the
various problems that come along with declaring a bankruptcy, it doesn't
have to be frightening; after all, bankruptcy was designed as a way for
those individuals and businesses who find that their finances are out of
control to get the help that they need to organize their finances and pay
off their debts.
Once you take the time to understand what bankruptcy is and how it
works, you won't find it as scary as you did at first.
Defining Bankruptcy
Bankruptcy is a legal term, meaning that an individual cannot within
reason pay off their various debts and have allowed the court system to
take over their finances for this purpose.
When filing for bankruptcy, the court will appoint someone to work out
the payments to your creditors and to determine how much of your income
must go to repay these debts. The court will either allow you to make
payments, or more likely will deduct a portion of your paycheck toward
this goal.
During this time, your credit will be limited… both by legal action and
by the reluctance of creditors to issue credit lines to individuals who
have declared bankruptcy.
Once the total amount set by the court has been repaid, the bankruptcy
will be discharged and you will be able to start rebuilding your credit
from the ground up.
Different Types of Bankruptcy
Several different types of bankruptcy exist, defined by legal codes for
certain purposes. The exact types of bankruptcy available differ from one
country to the next… in the United Kingdom bankruptcy can only legally be
applied to individuals and partnerships, whereas in other countries such
as the United States or Canada they can be applied to businesses as well.
Regardless of the limitations or allowances set by the government on
who is allowed to declare bankruptcy, the general purpose of bankruptcy
remains the same.
Lasting Effects of Bankruptcy
While you are working towards discharging a bankruptcy, your options
for credit will be exceedingly limited. Even after you've had your
bankruptcy filing discharged, though, you'll still find that you won't
have many options for a while… many creditors will still be hesitant to
work with you from between six months to two years depending upon the
creditor and the service that you're applying for.
You should also take care with any offers that you do receive, because
they will likely come with high interest rates and additional fees
attached.
Life After Bankruptcy
Bankruptcy isn't the end of the world… it's actually a chance for a new
beginning. As time goes by, the bankruptcy on your credit report will
begin to matter less and less as you eventually start to establish new
positive credit lines and build up your credit again.
Just like negative reports, your bankruptcy will eventually expire from
your credit history; the process may take up to seven years, and until it
expires there will still be those who are hesitant to deal with you.
Once it expires, however, the negative reports that preceded it will
also be long gone… and you'll find that your newer reports are all that
remain.
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