Category: A/R Financing

If You Need a Working Capital Business Loan, Avoid These Traps!

With banks so recalcitrant about lending money to desperate small businesses, quite a few unsuitable lenders have come out of the woodwork trying to exploit them. Now if you do your research properly, you’ll find that you have a lot more options than just getting a loan from a bank.

Your options for getting a working capital business loan can include factoring companies, crowdfunding, and other digital sources. But not all lenders are created equal, and some of them may actually do more harm than good for your company.

So when trying to obtain financing for a business, watch out for the following dangers:

Business Plan Providers

If you’ve ever tried asking a loan from a bank, then you know that one of the documents they’ll want you to submit is a proper working business plan. But some small business owners don’t know how to create one nor do they know how to make a financial forecast for their company.

Because of this, some “professionals” may offer to write your business plan and financial forecast for you. They’ll say that these will give you have a better chance of getting that working capital business loan you need from the bank.

But there’s a bigger problem here. You need to learn this skill of developing your own business plans and financial projections. By learning how to do these things, you make sure that as a small business owner you know what you’re doing. You’re familiar with the nuts and bolts of your business and you’re aware of what your goals are for growth.

Developing this understanding will help your business succeed, because you have a more accurate idea of how it works now, and how it should work in the future.

Business Credit Services

Again, it’s true that if you’re asking for a loan then your business credit is going to be very relevant, and you need top rating for your bank to approve the loan you ask for. That’s why there are business credit services offering to help you improve your business credit.

But when getting a loan, your personal credit is actually more important. That’s because your bank will insist that you be personally responsible for the loan, whether your business succeeds or not.

And in some cases, you don’t need business credit at all. Lenders don’t expect startups to have a strong business credit because by definition they don’t have much of a history to go with. And in accounts receivable factoring, your personal credit is much less important compared to the credit of your customers.

Hidden Fees

Some people may use the wrong factoring companies or credit cards to fund their business, and find out later that they’re paying more than they were expecting. When you’re using any lending option, you need to read the fine print and make sure that there are no hidden fees.

Discuss the loan with your lender and get assurances regarding the terms and fees. Make sure to put your agreements into writing.

 

Factoring Companies Can Help With Exporting

Out of the 30 million companies that are based in the US, less than 1% actually export their products or services. That means our country has the lowest percentage of exporters in the world.

Of the companies that do export, they’re mostly (97.6%) small and medium sized businesses, but the amount they represent is less than a third of the value of the US export goods. So in other words, the huge conglomerates that make up only 2.4% of the exporting business in the country actually account for two thirds of the export value.

In 2012, the value of US export was estimated at $2.2 trillion. So that means the large exporting companies (2.4%) made $1.47 trillion, while the bulk (close to 98%) of the exporters which is comprised of small and medium sized exporters made only $733 billion.

Clearly, there’s a lot of room for expansion in this industry, and more companies should participate in the export business.

And it’s here where factoring companies can actually help. They offer their basic financing assistance, but they can also provide services and products that can help ease the worries of US companies who are new to exporting.

There are 5 ways in which factoring companies can help:

  • They can offer working capital financing. This is the main advantage of working with factoring companies. The application process is fast, and the requirements are less stringent than what banks ask for. There’s even no need for collateral.
  • Clients can get credit protection. If you’re going into business by exporting overseas, you’re protected even if your foreign buyer is unable to pay. It’s a version of non-recourse factoring.

You get this protection because the factor is normally in charge of investigating your buyers. They investigate your foreign buyers, so if they give their approval then that means the foreign buyer does have the capacity to pay.

  • The factoring company takes care of collecting your accounts receivable. Again, this is a standard service offered by factoring firms. The factor collects the payment and then forwards to you the rest of your money after it has deducted the cash they advanced to you and corresponding fees.
  • They help you in understanding the foreign commercial code. They do things differently in other countries, so you may not have a clear idea of their rules that govern commercial transactions. But your factor can help you comply with all these rules so that you’re not bogged down by the details.

This is a crucial feature or service offered by the factor, because complying with unfamiliar commercial guidelines may not be easy. But now you can stop worrying about it because your factor can guide you through the process.

  • You get complete records for your bookkeeping. That goes for all stages of the transaction.

So if you’re having nightmares because of your newly established exporting business, see if you can find factoring companies willing to help.

 

Should You Factor Your Receivables?

Factoring is one of the more convenient ways to get additional funding to help a business get through difficult time or to take advantage of market opportunities. This financing option is not a loan. Essentially, factoring involves selling your accounts receivable so you don’t have to wait for the receivables to mature (usually 30 to 60 days) before you can get your money. Instead, when you factor receivables you can get as much as 80% of the value of the receivables in a day or two. The rest of the funds will be given to you when the customer pays in full.

So if you need money, is factoring a sensible option for you? Here are some of the indicators:

  • You have bad credit or you don’t have collateral. A stellar credit and collateral are what your bank will require from you if you ask them for a loan. But if you don’t have good credit and you have nothing to offer as collateral, you’re out of luck. In contrast, factors only care about the credit of your customers, and the receivables will serve as collateral.
  • You need the money ASAP. You should just factor receivables instead of applying for a bank loan, because bank loans just take too much time. Banks are meticulous with paperwork because they want to be assured that you can pay off the loan plus interest, on time.

On the other hand, factors don’t really like delays. It may take a week or so to investigate the credit worthiness of your customers, but once you have a factoring line set up and your invoices are factored regularly, you can get the money you need in a day or two instead of waiting 30 or 60 days.

  • Your accounts receivable collections are on a different schedule compared to your expenses. Factoring gets you your money right away, which can be a great help when you need to pay your employees on a weekly basis.
  • You only have few receivables involving large amounts instead of numerous invoices with small amounts. Usually, there is a fee for each account receivable factored by the financing company. So it’s better to consider factoring if you have a single invoice worth $100,000 rather than a hundred invoices worth a thousand dollars each. In the latter scenario, that involves a hundred fees in total.

So if you’re a retailer, factoring may not be for you. If you’re selling medical devices, for example, it may be better if you’re selling a large volume to hospitals than if you’re selling small ticket items to dozens of small clinics in the area.

  • You want to take advantage of the extra services offered by factors. Factors investigate your customers and identify which ones are creditworthy and which ones are not, so you will know which among your customers should be given term payment options. Also, factors take care of the collection, which means you won’t have to set up a separate department for it.

If all these things apply to your business, then you’re an ideal candidate to factor receivables instead of getting a bank loan.

 

Increased Demand for Accounts Receivable Factoring

There was a time not so long ago when factoring had a bad rep in the business world. Some considered it a commercial version of payday lending, and others regarded it as the only viable financing option for struggling companies. But while it is true that companies with bad credit and no collateral make extensive use of accounts receivable factoring, many others have found it an ideal way to get financing.

  • Fewer business loan applications are approved by banks. In 2012, the National Small Business Association reported that 25% of small businesses didn’t have the necessary capital to fund the growth of their company. Many business owners find it difficult to stay afloat even when market opportunities are presenting themselves. Yet in December 2012, it was found that of the small business loan applications less than 15% were approved.

In contrast, applications for accounts receivable factoring have a much higher chance of getting approved.

  • Bank loans take an inordinate amount of time. Banks like to investigate every little detail about the business who wants to borrow their money, and because of that, loan applications take weeks or even months to get processed. In contrast, factoring applications only take a short while because only the quality of the invoices is investigated. And once your business has a relationship with a factor and you keep the same customers, you can get the funding you need even faster.
  • Factors don’t require any other type of asset as collateral. The invoices are more than enough. In contrast, many banks require business owners to personally guarantee a business loan and this may require them to put up their personal assets as collateral just so they can get the money the need for capital.
  • Factors offer many services that banks don’t. Factors investigate the credit worthiness of your customers to see which ones are known to pay in full and on time. Their investigations can help you identify which companies deserve your business and which ones are best avoided. Factors also assume responsibility for processing the invoices and collecting the payments, and this means your company may be spared from having to set up a separate department for this sole function.
  • Factors don’t set limits with what you can do with your cash advance. When banks offer loans, often they want some input as to where you should spend that money. Banks want to be sure that they will get their money back, so they set limits on what you can and cannot do with the money.

In contrast, factors don’t care how you use the money. Once you get the usual 80% of the value of the invoice, you can use it to pay your employees, cover your overhead and operational expenses, or pay of your outstanding debts.

  • Factoring is technically not a loan. When you avail of factoring services you won’t have any debts listed on your credit report, because the money you get is an advance and not a loan. It does not affect your credit in any way.

With accounts receivable factoring, all these benefits are yours to enjoy. No wonder the demand for these alternative forms of financing continue to increase every year.

 

The Top 5 Benefits of AR Factoring

With banks not exactly in a generous mood when it comes to financing new companies, many startups and small businesses have turned to alternative ways of boosting cash flow. But of all alternative financing methods available, accounts receivable or AR financing has become one of the more viable means of acquiring funds.

There are several types of AR financing. But the premise remains the same. You use your accounts receivable to get an advance on the money owed to you, so that you can use that money immediately instead of having to wait months for you to get paid by your customer.

The benefits of AR factoring are numerous and substantial:

  1. You don’t need excellent credit. In fact, your credit score is irrelevant.

What’s relevant is the credit history of your customers from whom the money will eventually come. If they have an excellent record of paying invoices fully and on time, then you can get your financing request approved.

  1. It doesn’t take a lot of time. Asking a bank for a loan is a time-consuming procedure. You have to wait weeks, which can be frustrating since the loan application often ends in a rejection. But with AR factoring, the approval may be granted in as little as 24 hours. What’s more, setting up the factoring doesn’t take more than a week.
  2. You can use the factor’s credit department to determine the credit-worthiness of new customers. Granting credit to new customers is always an iffy proposition. You just don’t know whether or not they’ll actually pay up. But with your factor’s credit investigation, you’ll know which customers will most likely pay up on time.
  3. You can also use the factor to collect the payments on your behalf. You don’t have to hire your own collectors or use a third party collector. The factor collects the payments for you. They then take their fees from the payments, and then forward the rest of your money to you.

For example, let’s say that your factor gives you 80% of the value of the AR. When the customer pays in full in 30 days, you then get the rest of your money from the factor after the factor has already deducted its fees.

  1. Factoring boosts your cash flow for various needs. You can use the advance in any number of ways. You can use it to meet payroll, pay utility bills and office rent, or pay for supplies or inventory.

In addition, usually the factor doesn’t interfere on how you want to use the advance money you get. This is in contrast to how banks would want to know just how you want to use the loan they provide.

Some say that AR factoring can be expensive, and that’s probably true when compared to the interest rates banks collect from borrowers. But without factoring, it’s probably much more expensive not to get the financing in the first place.

Important Details about Purchase Order Finance Lenders

The general description of Purchase Order Finance is easy enough to understand. Let’s say you have a customer with a purchase order for $100,000 worth of items. The problem is that you don’t have the capital to pay suppliers for the materials needed to make those items. This is where purchase order finance lenders come in.

They verify the authenticity of the purchase order and check that the customer can pay for the merchandise. They investigate the capabilities of your supplier, and they check your capabilities as well.

If everything’s good, they then approve your request for purchase order financing. Your suppliers get paid, your customer gets their order, and you and the lender get the payment from the customer. The lender gets their cut, while you still enjoy a nice profit.

But the general description doesn’t’ touch on the specifics and some of the details are truly important. When you have your discussions with PO finance lenders, here are some details you need to find out:

  1. How do the lenders pay your suppliers? PO finance lenders don’t actually give you the money directly. Instead, they pay the suppliers on your behalf. This is usually done through letters of credit.

A letter of credit is a document issued by a bank, which guarantees a payment if specific conditions are met. For example, the supplier gets paid if they actually deliver $100,000 worth of items according to a specified delivery schedule. The letter of credit is given before the delivery, and once the delivery is done then the suppliers get their money.

This is a very safe method of payment for your lender, which is why when foreign suppliers are involved this is the payment method usually used.

But the problem is that some of your local suppliers may not be quite at ease with letters of credit. That’s because they can easily lead to complications, such as disagreements as to whether certain conditions are actually met. From the point of view of your supplier, they may send your supplies and they may not actually get their payment.

So ask your lender if they can also do wire transfers or even make cash payments. If they don’t, this can really limit the available suppliers you can use.

  1. What about prepayments? Many suppliers guard against not getting any money at all by requiring a deposit before they work on a given order. But some finance companies refuse to make a deposit. That means you need to ask if your lender can accommodate these requirements, should your suppliers ask for a deposit.
  2. Can they deal with guaranteed payment clauses? This is when your customer includes in your sales contract a guarantee that if they only sell X number of items, then they can return the unsold items to you and get a full refund for them (it’s considered a consignment).

You may negotiate better terms for these clauses, but it will help a lot if the PO finance lender has some experience with this kind of arrangement.

Working with purchase order finance lenders means you have to know all the details especially the ones we’ve mentioned above. They’re not as unimportant as you think.

 

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Loans for Doctors: Choosing the Right Lender

When it comes to borrowing money, doctors have it easy. This is true when they’re trying to get a home mortgage loan, or if they use the money for             their medical practice.

But the problem is that doctors aren’t really business-minded for the most part. That means they don’t often know how to choose the best banks that offer the right finance tools with the most suitable terms. This is understandable, but that doesn’t make it right.

So if you’re a doctor, here are a couple of basic rules to remember:

Shop Around

If there’s one rule that doctors need to know about, it’s this: don’t just go to your personal bank or the nearest bank and apply for a loan. You have to talk to more banks. You have to shop around and interview banks. This may be a strange idea for you, but you have to accept the necessity of it.

It’s a bit like interviewing a partner for your medical practice, and in a sense this is actually an accurate description. The bank will really want to be your partner. They want you to borrow from them for your medical practice, they want you to use their bank to finance your company and for your personal needs, and they want you to get a mortgage from them. And when other doctors ask you for bank recommendations, they of course want you to mention their company.

So how do you choose a bank? First, of course you should try to see which ones offer the best terms. But you should also make sure that they have ample experience in lending money to doctors so that they’re already familiar with your industry.

And if you want to take out a loan that’s SBA-guaranteed, the bank should also be familiar in dealing with the complications brought by SBA lending.

Choose the Right Type of Loans for Doctors

Too many doctors seem to think that a line of credit—or a credit card—is the right type of finance tool for just about anything. But that’s not exactly true.

For example, a line of credit may not be the best tool when you’re paying for medical equipment. Perhaps you can pay for the equipment through an installment agreement. You may even ask if it’s possible to just lease the equipment.

The rule of thumb for medical practices is that a short term loan should be used for a short term need. Conversely, a long term loan that lasts for more than a year is better for your long term needs.

If you use a line of credit or a credit card for your business, you need to pay it off right away or else you will be slapped with finance charges and high interest rates. It’s a better idea to get a term loan that extends past the expected useful life of the equipment you want to get.

Borrowing money for your medical practice can really help you out. But if you don’t even try to educate yourself financially, then you may not get the maximum benefits from your loan. The loan may even hurt your medical practice.

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The Case for Long Term Construction Working Capital Loans

While in theory a construction working capital loan can be used for just about any purpose, its most popular use is for paying off all bills and supply purchases required for normal operations. For a construction company, that usually means paying salaries of workers, office expenses, and equipment and supplies.

Construction working capital loans are usually needed to help a company deal with a temporary lack of funds. The construction company may end up earning a lot of money over a course of the year. But sometimes there are dry spells, and some customers do pay late. A construction company then gets a loan when revenues are not currently available.

When the clients pay, then the working capital loan is repaid because the company doesn’t need the extra money anymore. This is why construction working capital loans are usually for the short term only. Another advantage of short term loans is that you pay less in interest.

Yet despite all these arguments for short term loans, long term loans (or even intermediate term loans of up to three years) do have their advantages as well:

  1. Long term loans are easier to get. Everyone knows that traditional bank loans are quite tedious affairs. They take a very long time to complete, and there’s a great deal of paperwork involved. And often, the process doesn’t end in approval for the loan application.

That’s the advantage of working capital loans in general. Usually, the process is much easy and quick, and the approval rate is pretty high.

But the process may be faster and the approval may be higher when you ask for a long term loan. That’s because the lender gets more money back from its loan. Banks, like other finance institutions, like it when they earn more money for their services.

  1. You focus beyond making loan payments. With short term loans, repayment periods are short, but the payment amounts are high per month. Long term loans, on the other hand, require you to pay lower amounts per month. That has its advantages, even though you’re required to pay back the loan for a longer period of time and consequently pay more in interest.

When you’re required only to pay a small amount, then it’s easier for you to pay back the loan on time. You no longer have to wonder about where to get the money for the monthly payments. It’s more likely that you can get the money ready, so you can focus on your construction business more.

  1. It lowers your stress levels. Trying to figure out where you can get money to pay your loan can be truly stressful. You may also end up having to borrow more money to pay back a loan.

With long term loans, you also don’t have to worry about any unexpected expenses that can come up. You can sleep soundly at night knowing that your working capital can cover even unforeseen expenses.

So if possible, try to get a long term loan. By going this route, you don’t have to worry about making large payments, and you can focus your energy into doing what you do best: growing your business.

 

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