Invoice Factoring
1. What is invoice factoring?
Invoice factoring is an effective form of business financing. Rather than waiting 60, 90, or 120 days for invoices to be paid, a factoring company will purchase your outstanding invoices and pay them in as little as 24 hours. Cash now, for invoices due in the future means your company can use the cash to cover business expenses.
Let’s consider some cash flow challenges. Do any of these situations sound familiar?
- Have you offered your customers credit terms, which means they pay up to 90 days after an invoice has been issued?
- Has the bank said NO to your business loan?
- How about your line of credit? Is it at capacity?
- Is your cash flow becoming a constant challenge?
- Have you recently increased capital expenditure, negatively affecting your cash flow?
- Is your business credit too low to qualify for a traditional business loan?
- Do you need to improve your cash flow in order to grow?
- Does your company struggle to meet payroll?
Late payments can quickly cripple cash flow and bring a small or medium business to their knees. If these challenges sound familiar to you, invoice factoring could be the key to get your cash flowing.
- Recommended read: All about factoring
2. Ancilliary benefits of Factoring
Factoring is an absolute sale of an asset and therefore not a loan, it allows a business to immediately increase it’s cash flow without the introduction of long term debt. This therefore improves the balance sheet and debt to equity ratio among other things.
Businesses utilize the services of a factor to immediately increase their cash flow. However, the overall services a factor can provide a client reach far beyond cash flow. The ancillary services and the partnership that is ultimately formed becomes the basis for long term client retention.
Factoring is a product with a significant amount of practical “bells and whistles,” which if properly implemented and carried forward in a client’s business, create a solid credit and receivables management foundation. The true ancillary benefits of factoring are:
a. Credit Screening
Factors employ the services of outside credit reporting agencies such as Dunn & Bradstreet, Experian or other industry specific credit agencies. Many of these tools are cost-prohibitive to a small company but are critical for a factor to make a credit determination. Clients have the capability to utilize a factors credit investigation services prior to the extension of any credit. It is this investigation that can help a client establish appropriate credit levels for each individual account debtor. Proper credit extension is the first line of defense against losses and bad debt.
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b. Credit Monitoring
Factors will monitor an account debtor’s credit rating on a quarterly basis. Factors are looking for significant changes in the credit status which may affect the factor’s ability to collect the receivable. If a significant change has occurred, the client will be notified and modifications in the client’s credit limit can be made.
c. Credit Policies & Procedures
Factors cannot enforce account debtor credit limits. A factor reserves the right to purchase only those invoices that they deem are creditworthy. Therefore if a client extends more credit than the factor deems reasonable, the client simply will not get any availability on those invoices. Most factors share their credit rationale and credit experience with their clients. This allows clients to evaluate independent data and build their own credit extension procedures.
These procedures generally model the time-tested and effective methods employed by a modern factor. The ultimate result is the proper amount of credit extension to an individual customer based on their overall financial condition. Proper credit extension is the key to avoiding losses or bad debt.
d. Invoice Support
Factors handle thousands of invoices on a daily basis and see a wide variety of invoice quality. Those invoices match the account debtors’ requirements for prompt payment and those invoices that lack sufficient information or detail. Factors often share practical information and advice with their clients. The ultimate goal is to produce an invoice that matches the account debtor’s requirements and the terms of sale from the client. Oftentimes, poorly generated invoices are the cause of slow payment.
e. Effective Receivables Management
Factors are not a collection company, nor should they replace a receivables management program that’s already in place. They may supplement or enhance, but never be a replacement. In an ideal factoring relationship, a factor will become a transparent arm of the already existing functions. The client and factor will find middle ground on the management functions and work together with the ultimate goal to improve receivable collection times.
f. Reporting
Factors have very sophisticated software systems for the overall receivables management functions, including credit monitoring, receivables management and posting cash collections. Many of these reports exceed capabilities usually found in prepackaged accounting software and can be considerably useful for management purposes.
3. Conclusion
Factoring provides the desperately needed cash to perhaps the broadest spectrum of businesses today. It will remain a mainstream commercial finance product due to it’s broad accessibility, incredible flexibility and ancillary benefits.
Factoring is a dynamic financing tool that allows businesses to effectively make quality credit decisions, increase sales and stabilize cash flow. Ultimately business owners and executives rely on factoring for it’s most powerful benefit. Consistent and improved cash flow.
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