Any small to medium business growing at a fast pace requires a steady bank balance at all times mainly for salaries, payments to suppliers and even expansions.

If you have a fast growing business with a gross profit margin of above 15 percent and you require ready funds to increase your business, then you could be better off taking the services of a factoring company.

When you sell to your customer on credit, then you have to issue a sales invoice. You will then have to wait for 30 to 60 days depending on the credit period to receive that amount. This means that your money is blocked for that particular time and more if your customers delay the payment. When you have many pending invoices, you make a receivables statement, which is a list of all the pending invoices for which payment is yet to be received.

Receivables factoring is the process by which a third party, i.e. a factoring company buys your pending invoices and pays you the invoice amount minus a factoring fee in 2 installments. The first installment, usually 60 to 90 percent is paid within a day or two to your account electronically, and the balance amount minus the factoring fee, normally 1.5 to 15 percent is paid when your customers pay the invoice amount to the factoring company.

In short, they charge you a small fee for converting your headache to their headache. The advantage you get is multifold. You may have to apply for a loan from a bank to get ready funds, but that would require extensive documentation and time, and you would still have to pay a fixed interest on that loan. In factoring, you pay charges only on the invoice amount, which may go up or down depending on your sales. Or you could go in for capitalist venture funding that could result in interference in running your business. Receivables factoring is not only easy, but it also compliments your business, since the factoring company takes care of collecting payment from your customers as well as maintaining and sending you fresh receivables reports.

The factoring fee depends on some factors like the credit rating of your customers, the length of credit period and the receivables amount generated every month. So, if you are planning to hire a receivables factoring company, you should look at various factors like the factoring fee, the services provided by them, the length of the contract period with them and their overall quality of service in handling your customers. You should look at the quality of service first even if their rates are marginally higher because good relations with your customers are very important.

You can search for factoring companies even on the Internet or you can hire a factoring broker to do the same. The factoring company should be in a comfortable position to handle the volume of your receivables however large or small. Their service and attitude towards customers should be efficient and polite. Factoring brokers can help you to find a matching factoring company for your needs and you may not pay him any brokerage since the factoring company usually does it.

So, these are all the factors you may need to know about receivables factoring and if you do need their services, go for it.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

Factoring Tips

In the normal course of business, cash comes in as income and goes out as expense. This flow of receiving and spending cash for commercial purposes is known as the cash flow. Since the core objective of any business is to generate profit, the flow of cash is important as it directly affects the bottomline of the company.

Uses Of Cash Flow

Cash flow is used:

to evaluate the liquidity of a company

to find out ratios like the net present value and the internal rate of return

to act as a validating input for net income created by accrual accounting methods

Types Of Cash Flow

Cash flow can be:

operational cash flow (the flow of cash for normal operation of the business)

financing cash flow (the flow of cash for financial activities like loans, dividends, stocks, etc.)

investment cash flow (the flow of cash for investments like plant & machinery, land, and other long term capital expenditures)

Cash flow Constrictions

Cashflow can become constricted due to the extension of the credit period of your invoices by your customers. The more your sales increase and/or the more the credit period increases, the more constricted your cashflow becomes. The effect of cashflow clogging is seen sharply in operational cash flow. Until the cash from the previous and present sales rolls in, inventory cannot be purchased, orders cannot be executed, and business almost comes to a standstill.

Cash flow Funding

To solve this most common commercial problem, finance companies offer solutions to provide your business with a steady source of funds that increases in direct proportion with your sales. The finance offered by the finance companies to improve the cash flow is known as cash flow funding, which is typically in the form of account receivables funding or export receivables finance or purchase order finance.

Account Receivables Funding

Account receivables funding is also known as invoices funding or factoring. Here, approximately 85% of the value of your invoices is paid immediately, with the remaining 15% less the fees of the finance company paid to you when your customer honors your invoice.

Export Receivables Finance

To expand your overseas business profitably, some finance companies offer to pay almost 80% of your export receivables. The remaining 20% minus the fees of the finance company is paid to you after your overseas buyer pays your receivables. This enhances your cashflow during the work-in-progress and shipping stages. Moreover, the chasing and collection of the receivables may be done by the finance company as they have a multilingual staff, which is extremely well-trained in the laws, customs, and procedures of different countries.

Purchase Order Finance

Here, funds are provided against your purchase orders. The finance company can directly pay to your suppliers in cash, thereby availing huge cash discounts for your business. It can also provide letters of credit and supplier guarantees. This facilitates the smooth execution of your purchase order.



Thanks to Amelie Mag for contributing this article to our Factoring blog:

Structured Settlement Funding

If you are dealing in industrial products or any other items, where you need to provide credit to most of your clients, then you would realize very soon that most of your money is stuck with your clients and you can lay your hands on that money only after they pay you on the due date. This can only be frustrating and can seriously hamper your cash flow thus leading to delayed payments to your suppliers, your staff members and can also put a roadblock on your road to expansion.

In business factoring, a factoring company will purchase your credit invoices that you have issued to some or all of your various clients. They will then wire the amount of your submitted invoices within 2 working days into your account after deducting their factoring fee, which is their service charge for handling your account. This fee could range from 1.5% to 5% of the invoice amount and would depend on the credit period extended to your client, the credibility of your client according to the factoring company and the total volume of business that you can give to your factoring company. As you start giving invoices of a higher value, your factoring company might lower the factoring fees, thus providing some relief in the future.

If your sales ledger shows that you are supplying products on a credit basis to a variety of clients that are financially strong and if your credit period too ranges from 30 to 60 days only, then your business could be an ideal candidate for the business factoring company. This will not only encourage the factoring company to tie-up with you, but you will also be eligible for a lower factoring fee that will enable you to hold on to most of your profit margins.

On the other hand, if you are working on wafer-thin profit margins and providing a high credit period to most of your clients, then it would be suicidal to engage a factoring company, since you would hardly be left with any profit margin to sustain your business in the long run. If a single credit client accounts for most of your sales figures, then that too would pose a serious problem in case the client refuses to pay the outstanding amount or does not want to do any business with you due to any reason. Thus, a wide range of steady credit clients with a reasonable credit limit could be ideal for the business factoring company to handle your account.

You too could use the incoming invoice amount to pay your staff salaries, your suppliers and even follow-up on your expansion plans. This could help to propel your business on a faster scale. If you have recently set up your business, then this financial tool could help you to stand on your feet quickly and confidently. If your business is suitable for factoring, then you could shortlist various factoring companies and check out their features and services, before deciding on the company that most suits your business format.

Thus, you should check your profit margins and also consider the variety of clients that you have on hand, along with the credit period that you have provided to them before making up your mind on whether to engage the services of a business factoring company. Conduct a proper research on various factoring companies before making up your mind, since their actions will affect your relations with your clients.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

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