Leverage,
Liquidity, Cash Flow and Payroll; these are terms that cause many to cringe in
today’s economic turmoil. Given the complete
absence of business lending and zero access for capital growth, even the most
credit worthy companies are being hampered. The real question is how can a
company truly overcome the hurdle of cash flow constraints to meet their full
potential?
The
answer is simple; Accounts Receivable Financing also known as Factoring.
While
Factoring may seem like the new fad to some, in fact it has been helping
companies succeed since the dawn of civilization. Factoring hasn’t changed too
much, but it has gotten better. Today’s Factoring companies not only improve cash
flow by providing advances of 80% or more against current receivables, giving
you access to cash that would typically be locked up for 30-60 days, they also
provide expert credit advice and monitoring. Expert credit monitoring coupled
with a non-recourse service (credit insurance for your customers) means you can
eliminate all future bad debt. Let your Factoring company worry about the
credit stability of your customers while you focus on the business of doing
business.
Where
would your company be today if you could operate unhampered by cash flow
constraints brought on by delayed customer payments or lack of access to
‘traditional’ funds?
“But
wait”, you say. “This all sounds great,
but where’s the catch.”
You’re
wise to be cautiously optimistic. As with any other industry, there are the
good, the bad and the others. Know what
you’re getting into; read your agreement thoroughly and ask questions. Don’t be
afraid to ask for references. A good Factoring
company, with the experience to back their promises, will be able to provide
you with names of other clients who can help you understand the process.
“I heard it’s too expensive.” – Not true, factoring increases revenue and cash
flow while loans can do just the opposite. Factoring is about selling your
receivables, not borrowing money or going into debt. With factoring there is no
debt because there is no loan.
The
biggest drawback to a loan is the bank owns the management process of your
business and will probably never increase your credit to accommodate sales
growth. Therefor with a loan you can never expand your business to accommodate
growth and higher revenue. You become stagnant financially.
In fact
most banks are cutting credit lines with no explanations or warnings. Even
worse, most banks are now limiting the access to credit lines to 75%. Plus to
add insult to injury, the bank will then punish you with a fine for not
borrowing the whole amount.
This
doesn’t seem like a healthy financial situation for any business. With a loan you
can never run your business as you would like, you can never grow your
business, you can never give yourself or employees a raise and you’re almost guaranteed
to experience flat sales.
Factoring accounts receivable provides an immediate source of cash flow for your company.
You can use the cash to provide working capital, meet payroll, pay taxes,
replenish inventory, increase advertising, purchase equipment, improve your
credit rating, and cover any business expense.
Remember
to, your factoring firm should be assuming your daily accounts receivable management
activities, thus freeing up your time (or that of your office staff). How much is your time worth to you? Could you increase sales if you had more time
to focus on marketing? Don’t worry if
you grow too fast, there’s a product for that- FACTORING.
“What
will my customers think?”
Your
customers will respect and think you’re smart. You’ll be demonstrating that you
can operate the company without going into debt and that you’re making a choice not to go into debt.
“Do
you talk to my customers?”
The factoring
company will want to communicate with your customer on your behalf. Often this is to confirm balances owed to you
or to follow up on outstanding invoices.
It is important that you contact your customers and let them know to
expect a call. This will ease any confusion
they may have. In addition bear in mind,
your factoring firm does this for a living. As such, they are very good at
making the transition a smooth process for you and your customers. You should
ask for references who will give you a true idea of how the process works and
what you can expect from your customers’ response.
“How can I be certain that my customers will be treated
well?
The last thing a factoring firm wants is for you to lose a customer. Factoring firms are not collection agencies and will never harass your customers for money. Maintaining your customers’ goodwill and confidence are of the utmost importance.
“What information will a Factoring company need from my
company to begin the accounts receivable funding process?”
Along with a simple application, the Factoring company will require your company’s most recent accounts receivable and accounts payable aging reports, Articles of Incorporation or DBA filing, a master customer list, copy of your ID (i.e. driving license or passport) and a sample invoice with sample supporting documentation (i.e. Proof of Delivery, Order, Contract etc.).