One of the challenges of looking for conventional business financing is that it can take a very long time to find out if you will qualify for it or not. Although there are no hard and fast rules, most companies report that it takes a couple of months to go through the process. It’s understandable that institutions take that long to reach a decision, they have to do a lot of due diligence to make sure they make a solid investment. At the very same time, the long application process also puts your company in the very tough position of waiting a long time to know if you’ll get financing – or not.
If your company needs financing quickly – or can’t qualify for a business loan – you should consider whether invoice factoring is the right solution for you. Factoring financing has been gaining traction, especially among companies that need flexible financing.
Factoring invoices provides a simple very proposition. It allows you to get a funding advance against your accounts receivable, providing you with working capital to pay employees and suppliers. So, instead of waiting 45 days to get paid by a client, the factoring company can give you a working capital advance. This provides the financial liquidity to meet your company’s current obligations and allows you to take advantage of new opportunities.
Factoring can be incorporated into most companies and works as follows. First, you deliver your product or service. Then you invoice your client. Now, instead of waiting to get paid, you send the invoice to the factoring company. In turn, the factoring company advances about 80% of the gross value of the invoice to you. Once your client pays the invoice, the factoring company advances the remaining 20% of the invoice to your company, less the financing fee.
Factoring costs can be higher than the costs of conventional products (e.g. business loans), which should be taken into consideration. Monthly fees can range from 1.5% to 3.5%, depending on the company’s industry, financing volume and other parameters. As a rule of thumb, factoring works best if a company has margins of at least 15% and customers that pay regularly. However, each business owner should evaluate whether factoring will work for the company.
There are some substantial advantages to using accounts receivable factoring. First, accounts receivable financing is easy to obtain. Second, it’s a flexible financing solution where financing increases are tied to your sales, making it an ideal tool for startups. And lastly, it can be setup quickly. Depending on your transaction, many times it can be financed in as little as 2 weeks.
By: Marco Terry
Posts Tagged ‘Business Loan’
Using Invoice Factoring as a Source of Quick Financing
December 12th, 2009Trade Finance Alternatives
October 19th, 2009Are you selling goods or services both in the US and internationally? Then you know that finding the right financing tools is critical for the success of your business. Although finding the right business financing for US based transactions is not simple. Finding the right financing for your international transactions can be exponentially more difficult.
The most common tool used in overseas transactions is the letter of credit. A letter of credit is a payment vehicle that guarantees payment to suppliers and ensures that clients get the products/services they contracted for. The challenge with letters of credit is that they are as hard to get as a business loan. If you or your business cannot qualify for traditional bank financing, then more often than not you won’t be able to get a letter of credit. Unless, of course, you find an alternate business financing tool.
This is where factoring and purchase order financing come into play.
Factoring financing has been around for a very long time. But only recently has export financing (or international factoring) become a popular tool to finance international trade transactions. Factoring is a way to help business owners who cannot afford to wait 60 days to be paid by their international customers.
Factoring provides you with financing based on your international invoices from credit worthy commercial customers. Basically the factoring company advances you up to 85% of your invoices and holds 15% as a reserve. The factoring company waits to get paid while you get use of the funds. The remaining 15% (less a fee) is rebated as soon as your international customer pays the invoice. Furthermore, most factoring agreements will protect you from the credit risk.
Purchase order financing is a bit different. It helps distributors, resellers and wholesalers who have large purchase orders but can’t afford to pay their suppliers. The PO financing company covers all supplier expenses and helps with the delivery of the goods. The transaction is settled as soon as your customer pays the invoice.
As opposed to most business financing options, factoring and purchase order financing are easy to obtain and can be set up quickly.
By: Marco Terry
