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Using Your Receivables to Grow Your Business
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· Factoring to Grow Your Business * * * * * * * * * |
Every time you extend credit, or terms, to a customer,
you become the customer's banker.
You are lending to your customer,
interest-free, for however long it takes them to pay. The impact can be critical to your
business: Ÿ
You can't take
advantage of purchase discounts from your vendors. Ÿ
You may be
forced to walk away from new business with good payers. Ÿ
You may not be
able to pay your employees and your bills on time. A growing business often has
opportunities without the cash flow to meet them. Every business that has A/R has the
choice of financing its customers from its own resources or using outside sources. There are no other choices. Factoring may be the outside source
for you. Factoring is mostly for
growing businesses that need cash flow to allow them to take advantage of
opportunities. Factoring gets
much to most of each invoice into your account a day or two after you submit
it (amount depends on your industry, size of invoices, who your customers
are, etc.). Factoring is even
available to companies that have receivables totaling only a few thousand
dollars each month. Imagine having all the working capital you need! How much could you grow your business? ·
More working
capital. ·
No debt, so
you can still borrow. ·
Improved
credit rating. ·
Avoid having
to take in investors. ·
No problem
with seasonal demands. ·
Take advantage
of supplier discounts to offset the factoring fee. ·
Someone else
handles your receivables and does your debt collection – the way you
want it done. Your customers already deal with factors. Sometimes they know, sometimes they
don't, but it won't be a new experience for them. In fact, if they even notice, they are
likely to have more confidence in you because they see you taking steps to
grow your business. In any case,
probably the only person who will know will be the factor's point of contact
who verifies that invoices have been received and are valid. What businesses factor? Any business that has to
wait for its receivables is a candidate.
They usually have to pay their employees this week but don’t get
paid until next month. Some
typical examples include: ·
Staffing
agencies. ·
Service firms. ·
Consultants. ·
Construction
subcontractors. ·
Trucking
companies. ·
Manufacturers
(they might be able to finance some of their materials through purchase order
financing). ·
Auto body
shops (insurance work). ·
Leveraged
buyouts when the acquired company has substantial outstanding receivables
which can be sold at closing. Any company that might have to pass on a new
opportunity due to lack of cash flow should factor. (Note that only
commercial, institutional, and government accounts may be factored. Individual and residential accounts
can’t. However, if your
business is involves home improvements or something similar, we can arrange a
consumer financing program for you.) The factor doesn't care about your
credit, only about your customers' credit. Factoring is not a loan,
and it is not dependent upon, nor does it affect, your company's credit. You
don't need collateral, and there is no lien on your property (but there is a
lien on your receivables). Since
you aren't borrowing money, no debts will appear on your balance sheet or
credit report. The factor
pre-screens your customers for credit-worthiness, so you’re protected
from wasting your efforts on a deadbeat client. Because the invoice is usually sold
non-recourse, if your customer can't pay, it's not your problem. (If the customer refuses to pay until
you fix a problem, that is your
problem.) It may even be possible to factor your way out of
bankruptcy or tp pay off a tax lien. The factor receives and processes the
payments. They gently and
professionally remind – in your name - clients whose payments are
late. All your A/R department has
to do is receive a monthly activity report and confirm its contents. You might not even need an A/R
department if you outsource to the factor. If you are your own A/R department,
wouldn’t you like to focus on serving your customers, not collecting
from them? Yes, there is a cost to factoring. Factors
remind your customer for you.
They spot-check quality at delivery, so problems don’t
fester. They provide reports you
can’t produce. Factors let you do what you do well,
while they handle the receivables.
It's a cost of doing business that pays for itself with a high ROI and
helps you grow your business. For a discussion of the logistics of factoring,
including getting started, click here. Also take a look at cash
flow solutions other than factoring. Can
you afford not to factor? |
