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Other Ways Accounts Receivable Factoring Can Help Your Business

Probably the most notable reason why accounts receivable factoring has become so popular in the US and overseas is that it offers quick funding at a time when banks are reluctant to lend to small businesses. When you apply for a bank loan, it will take you a long time to find one that’s willing to do so and the application process can drag for weeks.

But with accounts receivable factoring, factoring companies are more likely to give you financing and they do so pretty quickly. What’s more, once the factoring line is set up you can get the money you need in a day or two.

But this isn’t the only help you get from factoring companies. By getting your funding by factoring your accounts receivable, you help your business in other ways. Take a look:

Invoice Tracking and Payment Collection

In accounts receivable factoring, the factor takes care of the invoice processing and the payment collection. They give you the advance on the accounts receivable, and your customers’ payments come to them. Then they send you the rest of the money minus the fees the factor charges.

Customer Evaluation

The factor also investigates the credit standing of your customers. That’s standard, because that’s where the money will come from that will cover the factor’s cash advance and fees.

So now you get an additional layer of protection against supplying a company that’s unlikely to pay up in 30 or 60 days. The factor investigates your customers and only gives it approval for the “safe” customers.

Supplier Discounts

With the money in hand, you can now pay your bills. You can meet payroll, hire more people, buy more equipment, pay back any of your outstanding debts, cover the rent, and engage in more serious advertising.

You can also pay for supplies more quickly, and that means you can enjoy discounts offered by suppliers. You effectively minimize your expenses.

More Financing Opportunities

One thing you also have to remember about factoring is that it is not a loan. It’s technically an adance of your accounts receivable. And that means there’s no additional debt reflected in your balance sheet, which makes it more attractive.

And because you don’t carry additional debt and you’re able to use the cash advance to pay any outstanding debts on time, you can improve your credit score.

What that means is that if later on you want to apply for a traditional bank loan or entice venture capitalists to invest in your business, you’re in a better position to succeed. Your improved balance sheet and credit score means you’re a better opportunity for banks and investors.

With accounts receivable factoring, the fact that you can get funding quickly in a business environment where so many small businesses can’t get financing is already an advantage you can’t ignore. Add the extra benefits, and it means you should really consider accounts receivable factoring as a more suitable option than a traditional loan.

Using Purchase Order Finance for Your Start-up Business

When you need additional funding for your new business, you should really consider purchase order finance over other finance alternatives.

Most of the time, you fund your startup with your own seed money. You probably have what you think is a great idea for a product, and now you want to make those products to sell. To do that, you use all your savings, and maybe even get a mortgage on your home so you can have startup money. Perhaps you even borrow from your friends and close family members who believe in you and your idea.

Potential Financing Problems

The problem with these sources of financing is that they don’t have enough to really fuel your growth. You need lots of working capital, and usually you have to start making your gizmos even before you get your purchasing orders. And getting additional financing can be a problem when you deal with traditional lenders.

In general, banks are hesitant to lend money to startups, because they aren’t all that enamored of the risks involved. Banks see small businesses as too risky, and new small businesses are even more fraught with uncertainty. The failure rate is so high that most banks just don’t bother funding small business startups.

And venture capitalists aren’t any better either. While the news media are full of sensationalized stories about new tech startups getting astronomical sums of money for funding from venture capitalists, the reality is that only a small percentage of new businesses get funding this way.

And there’s another disadvantage, in that with venture capitalists you have to give up a share of your company, which means you give up a share of your future profits.

Using Purchase Order Finance

So let’s say you’ve managed to convince a retailer to buy your products in bulk. They think that your gizmo is terrific, it can appeal to lots of people, and it’s profitable for them. So they place a large order, and that means you’ll need lots of working capital to meet that order.

That working capital will be needed to pay the manufacturing plant you commissioned to do a production run of your product. And they won’t do that unless you pay them upfront. After all, you’re a startup. It’s just too risky for them.

This is the stage where most startups have difficulty moving forward. It’s actually a very common situation, where a startup has a large order and no cash to meet it.

And that’s where purchase order finance comes in. They use the purchase order value as the basis for the cash advance. They take care of the manufacturing cost, and then when you fulfill the order and the customer pays, the lender gets back its advance plus the fee for the financing.

Requirements

The lender will have some requirements which you need to comply. Usually the lender will have some say as to which manufacturing plant will produce your gizmo. Then you have to demonstrate that you will earn a huge gross margin, at least 30%.

Finally, it’s a good idea to start negotiating for purchase order financing even before you finally get your P.O. The purchase order usually has a deadline (60 to 90 days), so you should have your financing lined up before the order arrives.

How Factoring Companies Can Help Trucking Businesses

When you’re an owner-driver of a truck or the owner of a fleet, there’s going to be a time when you’ll feel the need for some extra working capital. After all, you make money having your trucks roll through the highways hauling freight for brokers and shippers, and that constant travel can take its toll. And that’s where the factoring companies come in.

What Factoring Companies Can Do for Your Trucking Business

Factoring companies have several ways of helping you in your trucking business, but mainly it’s all about providing you with ready cash as quickly as possible. The financing application process doesn’t take more than a week, and then the factoring begins.

In the factoring process, once you complete a delivery, you provide a copy of the freight bill to the factoring company. The factor then verifies the invoice and you get a large percentage of the value of the invoice in your bank account right away. Some of the best factoring companies offer an advance of more than 90% of the value of the invoice, and you get the money in less than 2 days. The rest of the money goes to you once your customers pay the factor in full, and the factor then takes off its fees before it gives you the rest of the payment.

Factoring isn’t a loan, so it does not affect your credit rating or your balance sheet. So if you’re set on getting a bank loan in the future, you won’t have additional problems because you opted for factoring.

Uses of the Cash Advance

Now that you have money in hand, you can then pay for your fuel costs, and pay for your truck’s proper maintenance. If repairs have to be made, at least you have the money to use right away. If you’re the driver of your own truck, you now have money for meals and incidentals such as motel payments for overnight travel.

And if you’re a fleet owner, you can also use the money to cover payroll and meet other overhead expenses. You can even use the money to expand your business by hiring more drivers or by buying more vehicles.

Find the Best Factoring Company

Your best options for factoring when you own your trucking business is a factor that specializes in the trucking industry. They have the resources to investigate the shipper and brokers that make use of your services, so that there’s no delay in getting your money.

Some of the factors in the industry even offer fuel advances so you’re fully gassed up when you pick up a load. You may also get special fuel cards that give you a significant discount when you refill your gas tank. If you own a trucking fleet, these services can add up to a significant amount in savings.

Consider factoring if you’re in the trucking business. It can help make your operations smoother and enable you to compete with larger carriers. And you can even grow your operations so that you too will have a bigger fleet!

What Affects the Costs of Accounts Receivable Factoring?

When you apply for a credit card, usually the rates are stated quite clearly, so you don’t actually have to negotiate with the credit card company unless you’re having trouble paying your monthly dues. But in accounts receivable factoring, the cost of the funding depends on several things.

The Factoring Company

Like any other shops, banks, or medical clinics, factoring companies set their own rates and charge fees as they see fit. The best factoring companies will be honest in what they will charge you, and they may take some time to explain what it will cost you for various scenarios. For example, there may be a penalty involved if you break a factoring contract early or if your customer pays late.

So now compare the costs of factoring offered by different companies. Check all the fees your factor charges so you won’t have to deal with unwanted surprises later on.

The Industry

Some industries may charge more when you use factoring because of the inherent nature of the business. For example, in many cases medical receivable factoring can be more expensive because insurance companies are involved. On the other hand, factoring for trucking fleets tend to be simpler with higher cash advances because the job is not complicated at all.

The strength and stability of your customers is also a crucial consideration. When you deal with profitable and stable businesses as customers, then the costs/fees would be less.

Also, some factoring companies may charge less when they specialize in a particular industry, because their resources and services are already geared for that industry. A factoring company that specializes in the trucking industry will charge less than a generic factoring company if you’re in the trucking business.

The Aging Report

The aging report indicates the amounts owed to you by your customer, and it also says the length of time you give them to pay up on what they owe. Factoring companies will charge less if the customers regularly pay in 30 days than if you give them a 90-day term.

The Total Volume

If the total volume of your invoices is worth $500,000 a month, the rate will be lower than if the volume was just $30,000 a month. In fact, the factor would prefer to get all your invoices for funding. There’s an option where you can pick and choose which invoices would be factored (called spot factoring), but then the rate is higher. The rate may be as low as 2% of the value, or as high as 5%.

Like other lenders such as banks, factors prefer that you have fewer invoices with larger amounts involved when your customers are stable. That’s because they do the same work for each invoice, but get a percentage of the value of the invoice.

Negotiate

Finally, talk to more than one factor and negotiate with them. They may be inclined to offer generous terms if they know they have competition for your business. The costs of accounts receivable factoring aren’t set in stone until you sign your name on the dotted line.

Why You Need Medical Receivables Factoring

Medical receivables factoring is a special type of financing that can help businesses in the health care industry. Whether you’re a medical or dental clinic serving residents in your community or a business that caters to health care centers, with factoring you can get the funding you need more readily than if you apply for a bank loan.

How It Works

Factoring is simple. Instead of waiting for an interminable length of time for your customer or insurance company to pay the invoice, you simply submit the accounts receivable to the factor instead. The factor offers about 80% of the value of the accounts receivable in advance, which you can then use for your own purposes. Once the customer finally pays the factor in full, you then can receive the rest of the money once the factor has deducted its fees.

Purpose of Medical Factoring

There are many possible reasons why a business in the health care industry will want an infusion of cash. One very common reason is to boost the cash flow to help pay for employees such as receptionists and nurses. It’s not really a good idea to miss a weekly salary payment when you’re running your own business and you rely on dedicated staff to help you out.

The cash flow can also help buy supplies that medical clinics need, such as bandages and gloves. These supplies need to be replenished on a regular basis, and that means you need to have your cash flow ready to cover the expenses.

Another good reason is to procure more equipment. Even if you buy used medical equipment, the expense can be very high and can really put a dent on your cash flow. But more sophisticated equipment can put you at an advantage over your competitors.

So how can you get the funding you need? Banks are not as reliable a lender as they once were, and that means you need alternative sources of funding. For many clinics and other businesses in the health care, medical factoring stands as a reliable source of funding that’s unmatched in the benefits it provides.

Special Concerns

Medical receivables factoring is much like other types of factoring in other industries. However, some aspects of it are unique to the medical profession.

For example, there is the matter of dealing with medical insurance companies. Collecting payments is a common task delegated to factors, and in this case it is an extremely welcome relief for a lot of doctors. But medical factors must be experienced in dealing with these insurance companies to avoid any surprises.

Medical insurance companies often contest medical bills, so as a result they do not pay for the whole amount stated in the accounts receivable. As such the factor must expect this.

Another common occurrence is the slow payment of invoices. It’s not terribly unusual for insurance companies to pay only after 90 or even 120 days. This means that medical factors shouldn’t charge exorbitant rates for payments that go past 30 days.

Medical receivables factoring can be very helpful for clinics. But you need to make sure that you get an experienced medical factor so that you can maximize the benefits.

Top 10 Reasons Why Small Business Factoring is Increasing

Small businesses are now turning to factoring as a more viable way of getting funding. While there are several drawbacks (it seems more expensive than getting a traditional bank loan), small business factoring offers numerous advantages. Here are 10 of them:

You’re more like to get the funding you need from a factor than from a bank. Community banks are becoming fewer, while big banks deny almost 80% of all loan applications from small businesses. Meanwhile, it’s very easy to find a factoring service online that’s willing to provide you with the financing you need. This is true even if you’re a new company or you have bad credit.
The loan application doesn’t need a lot of effort. With banks, you need to prepare a lot of paperwork to prove that you’re a good business to lend to. But factors only investigate creditworthiness of your customers.
The loan application only takes a short time. In fact, some factors may only take as long as 48 hours to decide if they will be financing your company. That’s a vast improvement over the months it takes to complete a bank loan application.
You’re not required to personally guarantee the loan. Some banks even require you to put up your personal assets for your business loan, but this is not necessary for small business factoring. You only need to guarantee against disputes or fraud.
The financing is not considered a loan. This makes your balance sheet look more attractive, which will be important if you’re selling equity or trying to obtain other sources of funding.
The factor takes care of monitoring the invoices and collecting the payments. This frees you up from the overhead costs of maintaining a department for such a purpose, and you can concentrate on running your company. The factor can usually collect the payments in a professional manner.
You can get credit info on your customers. As have been mentioned, the factor investigates your customers, so you will find out which of your new customers are likely to pay within 30 or 60 days. This may prevent you from offering terms to customers with a history of not paying in full or on time.
Your financing grows as your sales increase. This means you can easily fund your business growth. Factoring involves getting an advance based on your invoices, so the more money involved in the invoices the more money you can get in advance.
You can pay off your suppliers early and get discounts in exchange. Also, your improved cash flow can allow you to buy greater volumes of supplies which can get a discount as well.
Your customers may be encouraged to pay on time. That’s because some factors report to credit agencies. And if your customers are aware of this, they may wish to pay on time to improve their credit rating.

These are just some of the advantages of small business factoring. So if you’re running your own business, you may want to consider factoring if your local bank is making it difficult for you to get the financing you need.

Common Mistakes When Applying for a Working Capital Business Loan

If your business needs to expand, you’ll most likely need a financing solution to make it happen. But whilst there are definitely plenty of banks advertising their loan products to small business owners, they have narrowed their lending requirements making it increasingly difficult for people to acquire a working capital business loan.

Here’s a list of mistakes often committed by entrepreneurs and small business owners when applying for a loan. By being aware of them, you may increase your chances of getting the capital resources you need so your business can grow.

Lack of planning

This particular mistake is actually quite broad because there are many aspects throughout the loan application process that a business owner fails to plan for properly. It begins with knowing if they really need the loan or not. They need to determine if spending an extra $100,000 for a new office space and furniture will be good for their business or if they can make do with the old furniture and tighter space for the meantime.

Planning is also essential prior to actually submitting a working capital business loan application. In order to be taken seriously by the lender, the borrower should have a comprehensive business plan that clearly explains his vision for his company, a marketing plan and how he intends to utilize the loan proceeds.

Preparing financial statements and other business loan applications is also necessary before you should approach a bank and apply for a loan. With sufficient preparation, it is more likely that you will get approved for a capital loan.

Being pressured into making a decision

Banks (and basically all kinds of lender) are in the sales business and if they consider you a suitable candidate, they’re going to use any tactic to push you into a decision. If you allow yourself to be easily swayed, you could end up regretting your decision. Make sure you do enough research, compare several lenders, and find out what their interest rates, hidden fees, and timescales are. These things are very crucial factors that need to be considered.

There are banks that charge as much as 80% and borrowers don’t even realize it. That’s because they only calculate the APR as the total fees divided by the principal amount (the amount they borrowed) instead of computing the interest based on the outstanding amount at every period in time (which is the amortized amount).

Finally, you must also find out how long it will take for the bank to review your application and fund the loan. Most banks take 2 weeks just to assess your application and then take 60 more days to release the funds. Time costs money and in business, time lost is opportunity lost.

Failure to negotiate

One thing you need to know about working capital business loans is that it’s never a take it or leave it proposition. You can negotiate for a reduced interest rate, better payment terms, and other perks/benefits. You can even haggle for a better deal even if you have bad credit. The secret is to do your research and familiarize yourself with the financing market trends so you can leverage your knowledge to come up with a win-win agreement.

How to Use Factoring to Get More Business

A lot has changed in the business landscape in the last 10 years, and analysists have reported that invoice factoring and cash advance sectors are increasing in popularity and momentum, growing at a double-digit rate each year. The market for factoring, wherein businesses take out a cash advance against their invoices, is even greater with Morgan Stanley stating the industry makes as much as $15B per year.

Why Factoring for Small Business is a Practical Option

With such a significant rise in popularity, one would have to wonder what makes cash advance services very attractive to small business owners. The reason for this phenomenon is not actually hard to comprehend. First of all, factoring is so much easier to obtain compared to bank loans. Banks usually check the length of history of the business, the amount of collateral needed and the payment terms of the loan, and many small businesses have not been around long enough to meet their criteria.

In addition, most traditional sources can only help borrowers who want to apply for long term loans (ie. 5 to 10 years). If you need credit and want to pay it off within 3 months to 3 years, banks usually won’t be able to help you.

How Factoring Works

There are many factoring companies online right now and they follow the same basic principle. If a business is having difficulty meeting cash flow, they can turn to a factoring service to get a cash advance so that they can continue their daily operations and even fund their expansion.

Factoring companies are very useful when it comes to short term cash advances and they provide “loans” of as much as 90% of the amount in the invoice. These alternative lenders, in turn, charge a “fee” for the service, usually a percentage of the invoice in addition to collection and management fees, if applicable.

When to Turn to Factoring

One important thing about factoring that a business needs to understand is that it’s not cheap at all but it’s also no more expensive than taking out a credit card cash advance. In fact, it’s probably cheaper and it also gives you the added benefit of not having to collect payments from your clients. Some factors even save you the hassle of doing credit checks on your clients because they can do it for you as part of their service.

But to ensure that you choose a trustworthy and honest factoring service, you have to take some precautionary measures.

Choose a factoring service that really understands your business. Do business with one that has a high level of understanding of how your business works and the processes you employ so you can stand to benefit most from the partnership.
Pick a funding partner with a consistent and guaranteed source of capital.
Examine the terms of the transaction. Check the interest rate and fees and compare the numbers with what other funding providers are offering.
Get a copy of the contract and read it in advance (before signing on the dotted line).
Scrutinize the management team, find out how long the company has been around, and ask for customer references.

Factoring as a financing option for a startup business has proven to be very useful not only to keep the company afloat but also to help them grow. With a steady cash flow, there’s nothing that will stop you from increasing your revenue and taking advantage of every opportunity you can get to make more money.

What are Asset Based Lending Companies?

In a perfect world, as a small business owner you can borrow money without collateral and lenders will just take you at your word. But then again, in a perfect world you probably wouldn’t even need additional financing. In the real world however, you may have to approach asset based lending companies to provide necessary funding for your business.

What Are Asset Based Loans?

Asset based loans are what you get when your business needs to boost your working capital because you’re having cash flow difficulties. Often this is not a case of poor market conditions, but actually a consequence of rapid growth.

For example, you’ve received a lot of purchase orders which offer a lot of profit opportunities for your business. But each purchase order requires a sizable investment because your suppliers are demanding payment upfront.

Or you can be a manufacturing firm and the demand for your products has suddenly tripled, so you open another manufacturing plant which again costs a substantial amount of money.

If your small or midsized business is trying to expand, but it is basically stable and have financeable assets, then this growth can be accommodated properly. Some lenders don’t even mind if your business doesn’t have a very high credit rating or a long track record.

Which Types of Assets Are Eligible?

The most typical assets accepted by asset based lending companies are accounts receivables. But other assets may also be accepted. These assets include the expensive equipment you use, the real estate the business holds, and the inventory of products.

What’s important here is that these assets must not be involved in any tax, legal, or accounting issue. If they are to be used to secure the loan, then they should not be already pledged as collateral to another lender, unless that lender agrees to subordinate its position. In other words, if your business is unable to pay off the loan, then the asset based lending company gets first dibs on your assets to pay off the loan.

The asset based lending companies inspect the assets and then offer a percentage of the value of the assets. Usually, with accounts receivables you may be able to borrow as much as 80% of the value of the ARs. For equipment and inventory, the money you can borrow is usually no more than 50% of the value.

Lenders may usually inspect the assets regularly especially when they involve equipment or inventory, and these inspections will be part of their fees.

Difference between Asset Based Lending Companies and Factors

When you deal with asset based lending companies, you are essentially borrowing money. While this may seem similar to factoring when you use ARs, with factoring you’re not borrowing money at all. Instead you’re selling your ARs.

Also, in factoring the factor is involved in the collection process. In fact, your customers pay the factor directly and they forward your money to you after they have deducted their fees. While many lenders now also prefer this approach, other asset based lenders may not have any contact with your customers.

The Increasing Popularity of Business To Business Finance

Just about every small business owner knows the value of having enough cash on hand to cover operational expenses and various emergencies. Banks aren’t exactly as helpful as they once were, however, so getting a bank loan or a line of credit can be excruciatingly difficult.

It doesn’t matter if your company is already profitable and established. The bank will still require a paperwork from you which will take many days to prepare. And the approval decision can drag on for many weeks and sometimes even months. And you may yet end up not getting the financing you need.

This is the current scenario which is fueling the rising popularity of business to business finance. Here are some facts you need to consider.

The B2B lenders are very easy to find, as you can just go online. Some online companies lend the money themselves, while others have access to as many as 300 lenders which can offer you terms for the loan once you put in your applications. This is a significant improvement over going to banks and negotiating for loans in person.
Each B2B lender has its own way of doing things. Some lenders offer cash advances against outstanding invoices. Others offer short term loans, and some are peer to peer lenders. Even payment processors such as PayPal are getting into the act by offering loans to some of its merchants.
Here’s an example of how an online lender uses your invoices to give you the money you need. You sign up to the lender’s website, and you allow the lender access to your bank account and accounting software such as QuickBooks Online. You pick an unpaid invoice worth $5,000 and you get the line of credit right away.

Then over the course of 12 weeks, the lender collects its repayments in weekly installments that are automatically debited from your bank account. While the fee may depend on the riskiness of the loan, but in general it may range from $243 to $343 when a $5,000 invoice is involved.

This translates to an APR of 38 to 54 percent, but at least the pricing of the fees is transparent. There are no hidden “processing” fees to pay as well.

Another example is to get the help of a consultant, which may not even charge you anything in fees when you apply for a loan. You simply indicate your particulars such as your name and employment and the amount you need. You’re then given a list of lenders with their loan offers. You pick the one you want, and then your loan is sent to your bank account. The money is then repaid through regular deductions from your bank account.

The popularity of this type of financing is increasing. One invoice based lender is now lending up to $200 million a year. Another short-term lender is now funding $3 million a day in loans. Because the loans are easy to get, it’s inevitable that this form of financing will become even more popular in the coming years.