If you’re trying to get more information about purchase order financing, you have probably realized that the terminologies aren’t explained properly. To help you along, here’s a purchase order financing glossary you can refer to:
Invoice factoring. In the purchase order, the buyer specifies how long they would need before they can completely pay the amount for the goods or services you’ve provided. You’ll then get an invoice instead of cash. The PO financier or another lender may then forward you a percentage of the value of the invoice, and you get the full amount only when the buyer pays you in full. You then get the rest of your money after the advance, minus the fees charged by the invoice factor.
Letter of credit. When you get financing through your purchase order, your funder doesn’t usually give you cash. Instead, it opens a letter of credit on your behalf. This letter of credit states a certain amount which is then used to pay your supplier when it delivers the goods you need.
Purchase order financing. You will get the working capital you need by using the purchase order as a form of collateral. Let’s say you get a purchase order for $100,000 and the cost of the supplies you need is just $60,000. But if you don’t have the ready working capital to cover the cost of the supplies (which you may have to pay immediately) then you may not be able to produce what’s asked of you in the purchase order. With PO financing, you get the money you need right away.
Purchase order. The P.O. is a legal document signed by a buyer requesting you as the vendor to provide the goods or services the buyer wants. Usually, it contains statements detailing the quantity and the description of the goods and services required of you, as well as a schedule as to when you should provide the goods. The price of the goods is also stated, including the terms of the payment.
Rapid growth rate. Most companies want to grow, of course, but sometimes the growth can be too rapid. If the demand for your goods far outweighs what you can get from your suppliers with your working capital and your available credit, then you may not be able to take advantage of the increased demand.
Sales volatility. This is a business situation in which the sales may have frequent ups and downs instead of a steady flow of sales. This is usually seen in highly seasonal industries, like flower shops and promotional item stores. When it’s a period of high sales opportunities, the orders for your goods may exceed what you can acquire with your current working capital.
Working capital constraints. These are the limits set by your available working capital. A limited cash flow means you will have limited stocks from your suppliers, which then limits the purchase orders you can fulfill. Purchase order financing is designed to enable you to get past these constraints.
There are pros and cons to every method of getting additional financing for your company, and that applies to account receivable financing as well. In this type of financing, you make use of your accounts receivable to get cash advance immediately instead of waiting for 30 or even 90 days to receive your money. The cash advance is usually a percentage of around 70% or 80%, and the rest is forwarded to you once your customer pays in full—minus the financing company’s fees for giving you the cash advance.
Another method of account receivable financing is by selling your accounts receivable outright. You may deal with a professional debt collection agency for this, especially when the payment is way past due.
So the question remains: account receivable financing—good idea or not? Regardless of the exact method you use to receive funding through your accounts receivable, there are some common factors which should help you decide.
The Advantages of Account Receivable Financing
There are quite a few here that worthwhile to mention.
The chances of getting the financing are quite good. Getting a bank loan is always a very risky proposition, but with your accounts receivable working as collateral then you definitely boost your chances and options.
It’s a very quick process. Even the slowest lenders may take only two weeks to get you your money. Some even have it ready inside a week.
You don’t need a great credit rating. That’s actually irrelevant, because it’s not your ability to pay that’s being questioned here. It’s your customer’s ability and willingness to pay what they owe which is important.
You can use the lender to act as your own invoice processing department and payment collection agency. That frees you up from setting up a department of your own.
Here are several classic objections to accounts receivable financing:
The fees may be too high.
The advance may not be sufficient for your needs.
You may be locked in a contract that’s too long.
This may all be true, but not necessarily so. That’s because the accounts receivable financing industry has become quite competitive, and now many players are offering very attractive rates. You may be able to negotiate a lower fee and a higher advance, and you may even place a limit on how long the arrangement will last.
Assessing the answer to the “account receivable financing good idea or bad” conundrum is ultimately your responsibility. Most financial experts will tell you that your first option should always be your bank. If you can swing a loan from your bank, then your worries should be assuaged.
For the most part, that’s true. But getting a loan from the bank is easier said than done. There’s still a very good chance that you won’t get the money you need, and it may take a very long time even if you don’t get the loan.
So if you are faced with the prospect of closing shop because you can’t pay your suppliers and your employees, then you know very well that account receivable financing is the better choice.
There are a lot of beliefs floating around the Internet these days about factoring and just how useful it is. But many of these beliefs are simply not very accurate. To cut through all the misinformation, here are the real facts about factoring which are backed by factoring statistics.
Factoring is increasingly becoming more popular all over the world. According to the latest factoring statistics,the world factoring total for 2013 stood at more than $3 TRILLION dollars. The use of factoring has increased in recent years, and there seems to be no sign of reversal in the coming years. In some countries, the use of factoring has increased tremendously. It increased by 49% in Morocco, by 55% in Colombia, and by a whopping 253% in Peru.
Factoring is more popular in some countries than in the US. Admittedly, the US does account for a lot of factoring volume, with a revenue of about $114 billion. China’s factoring volume is close to $530 billion.
Europe accounts for about 60% of all the factoring volume in the world, and several countries there do more factoring business than in the US. In the UK, factoring is a $419 billion industry. In France it’s $273 billion, in Italy it’s $242 billion, and in Germany it’s $233 billion.
Factoring can help save companies. First of all, only about half of all companies are still open and running after 4 or 5 years. And do you know why companies fold up? There are many possible reasons, but the #1 reason is usually because the company couldn’t manage the cash flow situation properly.
What These Numbers Mean
The conclusion from all these factoring statistics is that many companies could have lasted much longer if they managed their cash flow situation properly, and factoring is meant to help them do just that. In other words, perhaps the companies that failed would still be standing today if they took advantage of factoring.
Factoring, after all, isn’t a loan. That means there’s no risk of losing even more money and losing collateral in the process. It makes use of your accounts receivable and turns them into ready cash.
It’s a rather ironic solution to your cash flow problem, because it’s these invoices that are causing problems with your cash flow in the first place.
When you have a lot of these invoices and you have them in large amounts, this means that you have money except that these aren’t in your hands yet. You’ve delivered a product or a service, and in return your payment will come later. So you don’t have your money YET but your creditors, your employees and your utility providers want their money now. This is the very definition of a cash flow problem. And factoring solves this.
A lot of businesses all over the world have figured this out. With factoring, you get an advance on all these “promissory notes” so that you then have the ready cash to get your business running smoothly. It’s that simple and that easy. And in some cases, it’s the help you need that can prevent your business from turning into a failed business.
The Boston Beer Company is #13 on the Forbes List of America’s Best Small Companies, which is amazing when you consider that the company started out as a small home business. Today, it employs almost a thousand employees and its sales for 2013 was at $637 million. Now the company is worth more than $3 billion.
Its owner, Jim Koch is now a mentor and he readily gives out advice on how to succeed. And among the tips he gives out, the first one is about how crucial it is to have ready access to capital. If you are running a beverage company, you really need lots of financing in order to grow. But banks are notoriously tightfisted when it comes to lending to small business, which is why beverage company factoring has become more popular.
There are several ways to use beverage company factoring, as discussed below.
If you own a beverage company, most of your working capital will either be tied down in your invoices or in your inventory. And sometimes this can be a problem, especially when you realize that your expenditures are increasing while your distributors delay giving you the payment for the goods you provide. And some of your expenses must be dealt with immediately. These will include your overhead and salaries for employees.
Some people in the brewing business resort to obtaining venture capital, but this can be a mistake. This is especially true when you know you are posed for success.
One famous example is when a particular brewing company considered raising a million dollars by selling a fourth of their business. They changed their mind and resorted to factoring instead. They got the million dollars they needed, but they had to pay a quarter of a million as the cost of factoring.
That may seem steep, but that brewing company grew and achieved $5 million in annual revenue. Today this company is worth a $20 million. If they had gone with their first option by accepting venture capital, they would have sold a $5 million piece of the pie for just 1 million dollars. So by going with factoring, the brewing company essentially gained a net of $3.75 million.
This is the other main reason why factoring can be crucial. If your brewing company puts out a product that is successful among consumers, then there will be a greater demand for your brew. But that means you have to have the facilities in order to meet that demand. Without it, your company may fizzle out.
With factoring, you may be able to finance the construction of new facilities or improve your current machines.
Remember, factoring is not a loan. You are essentially paying for the privilege of getting your own money in advance.
Time is of the essence in the brewing industry, and you always have to be ahead of the competition. With factoring, you no longer have to wait 90 days to use the money owed to you. You can use that money now.
As a business it is important to know whether or not your sales contract will qualify for purchase order financing. First, what is purchase order financing for international orders?
Purchase order financing involves borrowing against the written sales agreement that has been established by the buyer and the seller. The sales contract is also called a purchase order and will detail the product or services that are to be sold by the vendor and will specify the shipping and payment terms, delivery dates, and other information that is relevant to the sale. Financing for purchase orders is available for both domestic purchases and international purchase contracts.
Here are some tips for determining whether or not your purchase order will qualify for financing.
Demonstration that you can Complete the Work
Financing for purchase orders will hinge on the company’s ability to complete the work so that the purchase order will be earned. Showing that you have experience in completing similar types of work will show the lender that you are capable of completing the job that you have been hired for.
Proof the Customer will Pay
Even more important than proving your business will be able to complete the work is proving that your customer is going to pay. You will need to show that your customer is financially able to pay the bill or that they are protected by some type of financial guarantee such as from an international recognized letter of credit from a bank, a bond issuance, or some other type of credit enhancement. This will help prove that you can pay back the purchase order finance loan.
The best customers include governments and companies that are large and publicly traded. A large private corporation can be a valid customer as well. International customers that have their finances validated through a letter of credit from a bank that is recognized are good customers as well.
For a larger construction project a performance bond is often used to help minimize the risk for the customer. This is also a method used to ensure that you are paid for the work that is completed. For subcontractors one of the best ways to handle the situation is to have the payment made to the contractor as a joint check that is paid to both your company and theirs.
International projects will typically have purchase orders that are backed either by a letter of credit or some other type of collateral that is predetermined. Once the purchase order is borrowed against the buyer will not pay the seller directly. This leaves the lender to rely on the seller for repayment.
Is Purchase Order Financing Worth the Cost?
Generally speaking, purchase order financing is only going to be ideal for margins that are more than 20%. In order to calculate your gross profit margin you will divide you anticipated gross profit by total revenue to see if the financing is worth the cost.
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Factoring is a financial strategy that allows businesses to obtain money from their receivables before customers actually remit payments. Factoring –also referred to asa / r financing- is a form of asset based lending that is used by a wide array ofcompaniesin various industries. Factoring is used by companies varying in size from a single employee to Fortune 500 companies.
In short, factoring allowsbusinesses to sell their a / r to a factoring company in an effort toincrease their cash flow.Accounts purchased by factoring companies typically collect in about45 days. A lot of factoring companies restrict accounts eligible for purchase that are aged Sixty days or less. However government receivables are typically accepted at 120 days.
Factoring is sometimeswronglyperceived as bad or final option financing, needed by financially troubledbusinesses thatcannot obtain bank financing. In reality, nearly all American factoring volume arises from contracts between large successful businesses, many of which are creditworthy, however they utilize factoring for its many benefits we discuss below.
Beyond the traditional factoring markets such as staffing, textiles, transportation, and medical, factoring companies these days purchase accounts from clients in nearly every industry, including electronics along with other consumer goods, government contracts, medical services, construction, and other service industries.
In spite of the prevalence of factoring in the US, small business owners, attorneys, accounting firms, financial professionals and judges have little understanding of this old type of commercial finance. Below is information that will help define factoring.
Additional SERVICES PROVIDED BY FACTORS
Factors provide a number of services to their clients related to the factoring transaction. These include:
In non-recourse (and partial non-recourse) factoring, factors provide credit protection to their clients. If a credit-approved account that a factor purchases without recourse is not disputed by the account debtor or otherwise ineligible, and is not collected due solely to the financial inability of the account debtor to pay, the factor must pay the full purchase price to its client.
Bookkeeping and collection services.
Factors often provide bookkeeping (ledgering) and collection services to their clients for the purchased accounts. However, in certain non-notification factoring transactions, the factor hires its client to service the purchased accounts, as agent of (and under control of) the factor (see below Notification and Verification).
Factors often provide financing to their clients by making an advance on the date of purchase. Typically, factors will advance an amount between 70% and 90% of the purchase price of the subject accounts. The advance can either be treated as an interest-bearing loan or as a partial prepayment of the purchase price. Most large factors treat advances as loans.
ADDITIONAL SERVICES OFFERED BY FACTORS
Beyond factoring facilities, many factors also offer a range of other services to their clients, such as: Accounts receivable financing (revolving loans), inventory loans and other forms of asset-based lending, such as term loans.
Purchase order financing.
Letters of credit.
Government contract financing.
Import-export financing and other forms of trade finance.
ADVANTAGES OF FACTORING
Businesses can garner several benefits by factoring accounts, as compared to traditional bank financing. These include: Reduction of credit losses, in non-recourse and partial non-recourse factoring, by the factor’s assumption of the credit risk on approved accounts.
-Reduction of credit and collection expense, and increasedefficiencies in the billing and collection functions, by outsourcing some or all of these functions to the factor. This allows the client’s management to focus their attention on production, marketing, purchasing and other functions, which can beespecially attractive to small and mid-size businesses.
-Improved and more timely financial reporting, from the factor to the client, on matters such as: zzthe aging of open accounts;
account debtor payment (collection) history;
disputes with account debtors; and
deductions claimed by account debtors on their accounts, such as deductions taken for lost, returned or damaged goods or discounts claimed by the account debtor.
-Ability to obtain financing in the form of advances by the factor against purchased accounts, in advance factoring facilities. Alternative forms of financing, such as asset-based lending, might not be available to a business, particularly if the factoring client:
is newly formed;
is growing rapidly;
is thinly capitalized;
has a narrow customer base, so that a large volume of accounts are payable from only a small number of customers (excessive concentrations);
has slow-paying customers (bad turnover);
has high credit losses; or
is financially troubled
-Few or no financial covenants, with higher or even unlimited funding on accounts accepted for purchase, especially in non-recourse factoring facilities.
-More limited guarantees. For example, the factor may accept a validity and non-diversion guarantee from the client’s principals that does not extend to credit risk assumed by the factor. By contrast, a lender might require a full guarantee.
-Enhanced ability to raise sales and smooth out seasonal fluctuations in demand, for example, by obtaining seasonal over-advances from the factor. Here, the factor will make an advance to the client, in anticipation of later arising accounts receivable (not presently existing) to be generated by the client and sold to the factor at a later date.
-A closer working relationship with the factor’s employees than might exist with a bank loan officer administering a line of credit, together with access by the client to the factor’s specialized industry knowledge.
Accounts receivables factoring, or invoice discounting as it is known in some places, is necessary for any new or growing business. It provides the needed capital for initiating production and it is a much safer and cheaper option than taking out a business loan. However it can be quite difficult to choose the proper factoring company since many of them offer different terms and fees. Here’s a list of things you will want to look into before striking a deal with any factoring business.
Read Customer Reviews
This is the first thing any business should do before they turn to a company for accounts receivable factoring. There are many websites that have unbiased reviews concerning factoring companies and you can even find video reviews on Youtube. When looking through reviews, the most critical aspect is to go through the factoring company’s credibility and customer service. Do they charge hidden fees? Was the process as quick and easy as advertised? How smooth was the communication between the company and their clients? Many reviewers are quite candid and blunt in their reviews so you’ll immediately get a good idea whether or not that specific factoring business can be relied on or not.
Check Their Experience in Your Industry
Most factoring businesses are also knowledgeable in some industries while others are flexible to handle several more. This is important to take note of because some industries have different financial structures. The way they pay clients and the way they handle open invoices could be different. If the factoring company you are considering does not have experience in your industry you might want to look elsewhere.
Shop Around for Quotes
Just because you found one factoring company that offers a good deal it doesn’t mean you can call it a day. Shop around and compare quotes. Sometimes they will lure you in with low fees but then get back at you with penalty fees, especially if your client goes bad and does not fulfill the open invoice.
Check Their Collection Procedures
This is very crucial because it can determine how well your relationship with other clients will evolve. Some factoring companies do not interact with your customers and allow you to collect the amount and then close the invoice. Others will openly interact with your customers and close the invoice on their own. Some businesses relate with their customers better if their debt collection and financial assessments with factoring companies is discrete. It is entirely up to you to decide which collection procedure is best and it is wise to know beforehand which type your factoring company of choice utilizes.
With these tips in mind you’ll be able to find the very best factoring company to handle all your invoice discounting needs. Yes, there are fraudulent companies out there and there are some that require more than others, but these elements will help you sort out the good from the bad. Accounts receivable factoring is inevitable for many businesses and doing business with a good factoring company is key to your success.
Factoring invoices is one of the things any business will need to continue operations and growth despite seeing financial instability caused by slow overturns and residual returns. It can be very difficult for your business to progress while you are still waiting for your clients to pay. Wouldn’t it be great if all your clients could pay you immediately? That might seem impossible but with factoring you can make it happen.
Factoring, also referred by some as invoice discounting, works much like a regular loan except in this case you are considering your invoice or accounts receivable as the ledger. The factoring company will consider your invoice and upon reaching an agreement will lend you the amount that you will be paid by your clients. Consider the example below:
An IT company was requested by a marketing company to develop a dynamic website and overall the payment was to be for $150,000. The IT company, needing resources to start with, factors the invoice with a factoring company. They lend the IT Company 80% of the accounts receivable (in this case it will be $120,000). They will only give the remaining 20% when the client pays the IT Company. The $150,000 that the IT company receives will then be paid to the factoring company, less the fees that the company will have to pay, such as interest fees and administration fees.
Is It Beneficial to You?
Every small or growing business requires liquid cash if they desire to move forward. A business cannot rely solely on their own minimal funds while working towards their accounts receivable, lest they fall into stale debt.
First of all, one has to consider the fact that factoring invoices yield more immediate cash. Most factoring companies lend up to 80% up-front. Banks will usually only agree to give you 50-60%. This means that you can get more resources to get cash flow back in order.
Secure Your Business’s Finances
You might be wondering about the likelihood that your client turns bad and does not fulfill the agreement and your invoice is left unpaid. In this case most companies have insurance offer that remedies the problem. They will still give you the full amount of the loan and they will be the ones to chase after the client to get the payment owed.
If you are still starting with your business or if you are in need of steady cash flow to finance your company’s expansion then factoring or invoice discounting may be your best solution yet. The process yields higher immediate cash-payback than what banks offer and you can get approved in 3-5 business days.
Processing fees, interest rates, and miscellaneous fees are much lower than what you’d expect and you can even avail of insurance to protect you in case your client defaults on the payment. Getting your cash flow in a steady rate is crucial for your business’ growth and factoring invoices is a much better, faster, and efficient means of achieving this.
• Immediate Cashflow: Get quick capital from receivables factoring of one’s eligible accounts whenever you want.
• Capitalfor New Companies:
Is your business new? Neebo Capital is aware of how small businesses struggle in the beginning financially. Account Receivable Factoring loans is most likely the ideal solution enabling you to leverage your customer’s credit to buildyour business from the start.
• Unlimited growth: If you selectaccounts receivable factoring, you’ll have access to the necessary capital on hand to finance new business opportunities. Unlike traditional lines of credit, which place a valuefor your company depending on today’s sales – factoring loans are designed tohelp with your continued business development.
• Credit Extension:
It is usuallydifficult when customers constantly find ways to extend payment beyondThirty, 60 & Ninety days. While you are assured the invoices are going to be paid, your clientsmight be outsourcing their accounts payable departments to Asia, or mailing your checks to another coast to be able todistribute themback to you. Invoice factoringallows you to extend your receivable terms in order to grow the big accounts.
• Collections Assistance:
Time is money- and chasing downpast due invoices can be very time-consuming. With receivables factoring you’ll get regular reports about youra / r, in addition toproblem-solving assistance.
• Early Payment Discounts: Your clients are regularly taking advantage of the two ten, net 30 terms that you offer. Why shouldn’t you? Receivables factoring gives you the capital you have totake those discounts and enhance thebottom line.
• Build Your Credit:
With Account Receivable Factoring and asset based lending your companywill havethe money needed to pay bills within a timely fashion-ultimately building your businesses credit score, which allows you to leverage your suppliers for better terms.
Account Receivable Factoring facilities are usually structured like a purchase with two installment obligations. The very first installment is generally 80% from the invoice value and it is provided to you the moment the invoice is offered towards the invoice discounting company. The 2nd installment, usually 20% minus the financing fee, is offered the moment the consumer will pay for the invoice.
So you have a business and you sell to clients on credit terms. Maybe you should consider credit insurance policies on your receivables. Why?
The simple answer is to reduce risk, and strengthen your businesses financially in order to establish a stronger bankline in the future.
However the deeper answer has to do with your business and its potential loss. The saddest stories in the factoring world come from businesses who lose their largest accounts overnight.
These accounts can be large fortune 500 companies with sound financials.However one bad press release or shock to the economy can have a trickle effect and bring their business to a halt. A perfect example of one of these unforeseen chain reactions, was the filing of bankruptcy of one of the largest food processing companies in the industry.
All it took was one massive press release about the “pink slime” found in processed hamburger meat and The King of Prussia, a PA-based food processor was devastated. Prior to the release the company processed about 500 million pounds of beef annually!
Now imagine if you are a suppler for this company with over $50,000 or $100,000+ in outstanding A/R. Prior to the pink slime press release you may have not been worried. The King of Prussia may have been one of your largest and secure accounts. However you now can see how quickly things can change in today business environment.
why should you buy credit insurance?
Had suppliers had credit insurance policies for their large customer “the king of Prussia” they would have recovered $0.80 to $0.90 cents for every dollar they were owed.
Sometimes – and this is the reason for credit insurance – there are unforeseen factors that influence the performance and survival of your customers. Whether those are the court of public opinion, mismanagement, or a bad acquisition, companies go bankrupt, leaving you and your company paddling up shits creek.