Category: Factoring Invoices

Working Capital Loans for Utility Companies

There was a time when giant utility companies monopolized the industry and charged fees as they saw fit. But not anymore. Because of laws passed in reaction to the Arab oil embargo in the 1970s, privatization of energy production is now possible. Companies can start producing energy for the mass market, and even small businesses can get in the action.

Huge Firms Leading the Way

Since major utility companies still control the vast majority of energy in the country, it stands to reason that large firms that offer cleaner and more affordable energy lead the way towards improved energy production.

  • In Georgia, a company called Georgia Solar Utilities (GaSU) is building an 80-megawatt solar farm. Its long range plan is to develop 2 gigawatts of solar power for consumers. The law mandates that the existing utility company Georgia Power buys the energy it produces, but its buying price was deemed too low by GaSU. Because of this, GaSU plans on selling their energy to the consumers directly.
  • In Colorado, a company called PanTerra Energy is registered as a geothermal utility. Its plan is to sell geothermal heating and cooling directly to owners of public and commercial buildings.

Geothermal pumps take advantage of the stable ground temperatures for heating and cooling, and they use 70% less electricity than do conventional air conditioners and boilers.

  • In California, the Gen110 Company is also trying to convince more homeowners to generate their own electricity through the installation and use of solar panels. Homeowners can save thousands of dollars each year, because they don’t have to pay the transmission and distribution fees that traditional utility companies charge to deliver the power from their power plants.

A Small Business Case Study

Even a small player can participate in this energy revolution, as long as it has sufficient working capital. One good example of this is PeakEnergy LLC, which was founded back in 2000. Its purpose was to help energy providers such as utility companies to make use of standing generators at private companies during periods of peak demand for energy.

Because of the service this small business provides, utility companies didn’t have to build more power generation and transmission capacity to meet the energy demands for these peak times. Nor do they have to charge higher prices for additional power for these peak periods. Even the owners of the backup generators benefit because they get a credit when their standby generators are used.

The founder of PeakEnergy was able to start his business with a grant from the American Public Power Association, along with a working capital loan guaranteed by the SBA. The working capital loan was used to develop the custom Internet-based software, and also to buy the required hardware used to connect with the generators. With this system in place, energy service providers can control multiple standby generators from their respective dispatch centers.

As you start and grow your own small business utility company, working capital will always be an issue. Get a working capital loan so you can make sure you have enough purchasing power for your own small business.

 

Farming Working Capital Loans

As a farmer, perhaps you may need additional capital to buy, construct, or remodel facilities so you can expand your business. You may also be contemplating the purchase of new farming equipment to boost the efficiency of your operations. These are all great, and they indicate that your farming business is thriving.

On the other hand, it may be difficult to do all these if you lack the working capital you need to run your farm smoothly. It’s not always easy to compute the amount of working capital you need. If you don’t have enough, you may need a working capital loan to support your farm, and that’s not always easy to get.

What is Working Capital?

Technically speaking, working capital is what you have once you compute your current assets (the cash you have, the value of your crops and livestock, and your accounts receivable) and then deduct from it your current liabilities (accounts payable, along with any debts and interest you need to pay for the next 12 months).

A good amount of working capital to have available is about 15% of your farm’s gross revenue, although it may be more comfortable to get this to up to 25%. So if your farm generates $300,000 a year in gross revenue, then your working capital on hand should be at least $45,000 (the bigger it is, the better).

It’s crucial that you have enough working capital on hand if you want your farming operations to run smoothly. Your working capital gives some measure of protection should something go wrong.

For example, disease may spread through your livestock, or perhaps climate change is adversely affecting the volume of your crops. Having enough working capital also means you don’t have to take a loan for which you will have to pay interest.

Protecting Your Working Capital

One way to preserve your working capital is to be extra conscientious whenever you’re making a serious purchase with your money. Major expenses affect your working capital, so you need to consider each purchase carefully.

For example, you should think carefully if a purchase is necessary at this time or if it can be delayed. If you’re buying new farming equipment, you may want to see if a used equipment can be just as good so you can save money. You may also want to have a major purchase financed so you preserve the cash you have ready for contingencies.

But some farmers may have problems maintaining some semblance of working capital throughout the year, especially when the farm only gets two or so huge paydays per year.

Obtaining Farming Working Capital Loans

Not all banks are enthusiastic about lending money to farmers, especially when the farm is small. But some lenders do focus on this industry.

Different lenders will have different conditions regarding the loans. Often you will need to secure the loan by offering real estate and farming equipment as collateral. Repayment conditions may also vary with some asking for regular payments while others may want to get half of all revenues as they come in.

These loans can be used for a wide variety of purposes. If you need working capital for your farm, you may want to get a loan as quickly as possible.

 

A Working Capital Loan Will Generally Not Affect Working Capital

What is working capital? There are several definitions and explanations being bandied about it online, but it’s actually very straightforward. “Working capital” usually refers the money you have right now minus the debts you need to pay right now or in the near future.

In short, working capital = immediate assets – immediate liabilities.

Your immediate assets include the money you have in your bank accounts, your inventory, and your accounts receivable. Your immediate liabilities include payroll, utility bills, supply expenses, office expenses, and short term debts.

For your business to operate smoothly, your working capital has to be a positive figure—you need to have more current assets than current liabilities.

If your current assets are less than your current liabilities, then you have a problem, because you don’t have to means to pay for your debts and obligations. You will then need a working capital loan.

How a Working Capital Loan Affects Your Working Capital

When you get a standard long term loan, it usually means you boost your working capital. For example, if you get a $100,000 loan payable in 3 years, then that means you increase your working capital by $100,000 because your immediate liabilities have not increased as well.

But with a short term working capital loan, you don’t boost your working capital. That’s because while you get the $100,000 to use right away, you also add $100,000 to your short term debts. That means there’s really no net difference to your working capital.

For example, let’s say you get an 80% advance on your accounts receivable now, with the rest coming to you when your customer pays up in full. You get more money now, but essentially you reduce the value of your accounts receivable. You basically end up not increasing your working capital at all. But you did improve your cash flow.

So What Increases Working Capital?

There are several ways to increase your working capital.

  • You can get a long term loan. This is one of the main reasons why small businesses borrow money from banks on the first place. You get more money to use, but you don’t incur any immediate debts.
  • You can boost your net income. Your net income is the money you earn minus the money you spend. This is the normal way of boosting working capital, since these profits can then be used to pay for current liabilities.
  • You can sell a fixed asset, such a building or an expensive piece of machinery. This can really boost your working capital, especially if you sell something that you don’t really use.

Proper Use of Working Capital

Working capital, by definition, should be used to your benefit. Now having enough working capital is a problem, but so is having too much working capital. That means you’re not putting that money to good use. For example, you can use some of your excess working capital to buy useful fixed assets such as equipment or real estate.

The Need for Factoring When It Comes to Commercial Industrial Refrigeration

If your business is in the food industry, either as a supplier, supermarket, or a restaurant, then in all likelihood you’ll need commercial industrial refrigeration. It’s virtually mandatory, because without it, food inventory will spoil. And of course, you may also be held liable if people suffer because you served them spoiled food.

But commercial industrial refrigeration is not exactly a minor purchase. It’s a major expense. If you need a new industrial refrigeration system then you may need additional financing to cover the expenses.

Paying for Industrial Refrigerators

Buying an industrial refrigerator does not entail a visit to your neighborhood appliance store. You’ll need to look at sellers which have a nearby warehouse where they store these equipment. You can pay straight cash which may deplete your cash reserves, or pay in monthly installments.

Either way, these refrigerator units represent a major drain in your cash flow. And the expense doesn’t stop at the initial cost. Your electricity consumption will also rise dramatically. A commercial refrigerator used in a grocery store can consume up to 17,000 kilowatts per year. A larger commercial freezer may use up to 38,000 kilowatts per year. If you maintain a warehouse full of perishable goods, your refrigeration costs can be sky high.

If you’re having cash flow problems, you may be able to swing a bank loan to cover the expense. If not, then perhaps alternative forms of financing such as factoring may be able to help cover your monthly expenses.

Choosing the Right Type of Refrigerator

There are several types of refrigerators, and you’ll need the right one to maximize the benefits you get. First of all, you’ll need one that’s suitable for the products you deal with. Some are for food items while others are for beverages.

You may also decide whether to get a refrigerator unit that’s out of sight or a unit designed to display the items for the customer. These units cool the items inside while they allow customers to choose the items they want from within.

You’ll need the right size to accommodate the type and quantity of the items inside. You also need to make sure that the proper temperature is achieved. Some food items need only to be cooled, while others need to be frozen.

Refrigeration Maintenance

The first thing you need to do is to make sure you have power generators in case of a power outage. This is a must, because the best refrigerators in the world are useless if you’re totally reliant on steady power output from your local electric company.

After that, you need a contingency plan should any unit fail. Some businesses use a series of refrigerators, and they make sure that if a refrigerator unit fails then the others have enough space to accommodate the extra items transferred from the defective unit.

But regular maintenance must also be performed so that the unit can last for a very long time.

Whether you own a supermarket, restaurant, hotel or food distribution company; or you have a commercial industrial refrigeration business, factoring can help ensure operations without any hiccups.

 

It’s So Easy to Get Loans for Doctors

Doctors, by all accounts, have to pass through a huge number of tests and certifications before they can actually be licensed to practice. They have to spend 4 years in a good college, and then pass a test to go continue their studies. Then they have to spend another 4 years of medical school, after which they need to pass the medical board. Then they specialize.

But at least this profession has its rewards, and we’re not just talking about the satisfaction of helping people get better. We’re talking about ample compensation, and easy ways of borrowing money for whatever reason.

Benefits of Special Loans for Doctors

Here are some of the advantages doctors get when they’re trying to get a personal home mortgage loan:

  • The process is expedited. This is quite an improvement over the usual glacial loan process with banks.
  • Approval is almost automatic. Even recent medical graduates can get these special loans for doctors, despite the high level of student-loan debt.
  • Loans with no down payments are common. This is very hard to find these days, but it’s not a problem with doctors. For new doctors, loans for up to $500,000 may have no down payment requirements. A $1 million loan may require only 5% in down payment.

With just a year of post-residency, there may be no down payment for a loan of up to $650,000 and only a 15% down payment on $1.5 million.

  • There’s no private mortgage insurance. This is the insurance that a borrower pays to protect the lender in case of default. But doctors don’t need to get mortgage insurance, which lowers the cost of the loan considerably.

Why It’s Easy to Get Loans for Doctors

Haven’t you heard that rich people who don’t really need money are the people that banks love to lend money to? In the case of doctors, that’s absolutely true. Banks lend money to people who are able to pay their debts, and doctors fit that description well.

According to the Bureau of Labor Statistics, in 2012 primary care physicians get a median annual compensation of $220,942. Those who practice medical specialties receive a median annual compensation of $396,233. Those who specialize in anesthesiology received a median annual compensation of $431,977.

Now when you consider that physicians and surgeons as a group has one of the lowest unemployment rate among all jobs at only 0.8%, you begin to understand why banks feel safe lending to doctors.

There’s another bonus for banks too. They can require doctors to open other accounts with the bank as well. So when the doctor borrows money for their medical practice and for their home mortgage, they put their medical practice’s money in the bank, and they put their own personal finances there too. And when a new doctor is looking for a bank recommendation, the doctor who got the loan from the bank can recommend that bank to him.

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The Importance of Experienced Purchase Order Finance Lenders

On the face of it, purchase order finance seems easy enough to understand. When you have a purchase order but you don’t have the money to fulfill that order, you go to purchase order finance lenders to provide you with the working capital you need. You then get the money to pay for supplies, you make or deliver the product to your customer, and both you and the lender get paid.

But it’s not actually that easy, and a lot of complications can crop up. After all, the lender has to deal with you as the borrower, pay the suppliers, and then collect the payment from the customer. And if foreign suppliers are involved, it gets even more complicated.

So what you really need is an experienced purchase order finance lender. So here are the things you need to find out about the experience of prospective PO finance lenders before you choose which lender to work with:

  1. Length of time in the business. This is an obvious question, but it’s crucial to ask nonetheless. There are too many new finance companies trying to help those who have been denied loans by banks, but some of them are still feeling their way around.

While these lenders are getting more experience, their education may come at your expense. They may in time figure out what to do when specific problems arise, but that may be too late to help you out.

  1. Focus on purchase order finance. Quite a few finance companies offer purchase order financing. But in reality, it’s not really their main focus. They actually specialize in factoring, and the PO financing is just a side business. They just offer it because it can lead to factoring deals.

Now these firms may work out when the PO financing is simple or small. But a lot of these PO financing deals can get complicated, and you need a specialist who knows what to do when complications come up. It doesn’t matter if a finance company has been in existence for the last ten years, when in reality they only do a couple of PO finance deals a year.

  1. Familiarity with your industry. Each industry has its own procedures and rules, so you need a lender who is already familiar with those rules. That’s why when you ask around for recommendations for a PO finance lender, you ask other people in your industry. It’s the same thing when you ask for references. You should find out if the lenders have references in your industry.

The lender is supposed to help you out with your financing. You need to focus on fulfilling that purchase order, and not have to waste time teaching your lender the ins and outs of your industry.

  1. Experience working with your particular customer. Your best bet is always a lender who has dealt with purchase orders from your customer before. Many of the bigger companies have complicated purchase agreement rules and regulations, and it will really help when your lender is already familiar with them.

Purchase order financing can be a maze filled with traps and dead ends. What you need is a lender who already knows the way so they can ensure you don’t get lost.

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Get a Factoring Proposal from Each Lender So You Can Evaluate Them

Click Here To Get A Factoring Proposal
Click Here To Get A Factoring Proposal

One of the surest ways of comparing factors is to get a factoring proposal from each of them. Here’s how you do it:

  1. First you need to make sure that the factoring proposal contains all the necessary information. It has to specify the advance, which is the percentage of the value of the invoice given to you initially; the discount, which is the rate you pay for the cash advance you receive; and the factor’s additional fees.
  2. Next, check if the advance is enough for your needs. Get a list of the invoices you will submit (and those which you know will be approved for factoring) and then calculate how much you can get in advance for them. Is the amount of money you’ll be receiving in advance sufficient? Keep in mind that some lenders may offer only 70% of the value of the accounts receivable, while others may offer as much as 90%.

If the advance from a particular lender is not enough for your needs, then they need to be eliminated among your candidates.

  1. Now it’s time to look at the discount rate. This is much like the interest rate for loans. There are several ways of looking at this number. For example, some experts recommend that you find out the “true cost per dollar” by dividing the discount rate by the advance rate. A 70% advance rate with a 3% discount rate gets a true cost per dollar of (0.03 ÷7) of $0.0429. But an 85% advance rate with a discount of 3.6% has a lower total cost per dollar at just $0.0424.

What you need to remember is that the discount rate applies to the amount of the invoice, and not to the money you get in advance. This is why getting a larger advance is better than a smaller one. If you get $80,000 in advance from your $100,000 invoice, you pay $3,000 for the privilege if the discount rate is 3%. But if the advance is just 70%, then you only get $70,000 and you still pay $3,000 for that money.

  1. Finally, you need to think about all the ancillary fees the factor may charge. There may be setup fee for the factoring line. There may also be a fee for each account receivable, so that a pack of ten receivables totaling $100,000 can be ten times more expensive in ancillary fees than a single receivable worth $100,000.
  2. Add the total cost into your analysis, so that you will have a very clear picture of how much you will get in advance and how much you have to pay for this kind of service. The lower the total cost, the better it is for you.

Just keep in mind, however, that when you get a factoring proposal it should not be your only consideration. You need to know if the factor is easy to work with, if they are trustworthy and professional, and so on. You will need to ask for references to find out.

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Accounts Receivable Financing is Based on Customers’ Ability to Pay

As a small business owner, sooner or later you’ll need a loan. You may want to use the money to help solve your cash flow difficulties such as paying overhead and payroll, or you may need some funding for your business growth. And obviously, you’ll turn to banks for a loan. But many businesses these days are turning towards alternative lenders who can provide accounts receivable financing.

In this method of financing, you use your accounts receivable—you get 70-80% of its value right away, instead of waiting for 30 or even 60 days to get your money. And one of the most notable features of this method is that accounts receivable financing is based on customers’ ability to pay.

Why is it important that accounts receivable financing is based on customers’ ability to pay? Here are some reasons why:

  1. It speeds up the financing application process. Banks are notorious for acting slowly on loan applications. There are loan application papers which may total up to three inches thick. You have to disclose your business model, your revenues, your expenses, your assets, and everything else simply to provide the bank with the answer to one crucial question: will you pay back the loan?
  2. Since accounts receivable financing is based on customers’ ability to pay, your credit has nothing to do with the approval for the financing. Everything is much faster, because the lender just checks how often and how quickly your customers pay. If they have a consistent history of paying fully and on time, then the financing is good to go.
  3. The approval rate is higher. This is why the approval rate for bank loans is not that encouraging: banks want your credit history to be absolutely pristine and your business should be efficient and doing well. It actually seems that they only want to lend you money only if you don’t need the money in the first place.
  4. If you show signs that there is a possibility that you won’t be able to pay back the loan, then your loan applications will probably be rejected. Banks are very wary these days and they don’t want to take part in risky loans.
  5. You get assistance in researching customers. It’s hard to run a business when customers don’t pay promptly. But it’s also difficult to run a business successfully if you insist on getting paid up front every time. If you require that all customers have to pay when you deliver the goods or services they need, you won’t have too many customers.
  6. So you have to extend some form of credit to your customers. However, there’s always the risk that a customer won’t deserve the credit at all. But because accounts receivable financing is based on customers’ ability to pay, you have experts investigating your new customers for you, so that you have a pretty good idea of their paying history even if you don’t have any experience with them yet.

Comparing Factoring to Line Of Credit: Which One Is Right For You?

Comparing Factoring to Line Of Credit: Which One Is Right For You?Quite a few businesses these days have heard of factoring, and they’re now comparing factoring to line of credit to see which one works out better. To make this comparison, let’s take a closer look at each.

How a Line of Credit Works

The first step is to apply for a line of credit from your bank. With a line of credit you get a maximum limit of money you can draw from a bank and you don’t have to take out all the money at once. It’s much like having a credit card for your business. If you have a $100,000 limit then you can borrow the full $100,000 or borrow only $10,000. You then pay only the interest on the amount you borrow and the principal amount.

Getting approval for a line of credit these days can be a very long and complicated procedure. You better make sure that your credit is very good, otherwise your application may just be denied or you won’t get the limit you want. And if you reach the limit then you have to renegotiate with your bank for an extension.

How Factoring Works

With factoring, you don’t go into debt at all. You simply send your invoices to your factor, and they give you a set percentage of the value of the invoices in advance. For example, if you have an invoice for $100,000, then you can get anywhere from $70,000 to $90,000 in a few days (or even in just one day). You don’t have to wait for the due date on the invoice which can be for 30 or even 90 days. Once that customer pays the factor in full, you are sent the rest of the payment, with the factor pocketing the fees from that payment.

Getting approval for invoice factoring is very easy and your personal credit isn’t even an issue. And you can also control the amount of money you receive. If you need more money in advance, then you simply send more invoices to the factor for an advance. Your factor can help you keep track of your invoices, they can do the collecting, and they may even investigate which clients have a good record of paying in full and on schedule.

 

So which one is better for your business? If you can get a line of credit from a bank quickly and the interest rate is reasonable, then that’s your better option. But that’s a very big if. Credit card companies can really charge a lot in interest. And for that reason, many businesses are opting for invoice factoring.

With invoice factoring, you are much more certain of getting approved and the entire process is much faster. Once you get approval, you get your money very quickly. And there’s no debt involved that can further affect your credit rating. You may even get additional services that make your entire operations much more efficient.

It’s up to you to decide which one is better for you when you’re comparing factoring to line of credit. But for practical purposes, it’s pretty much obvious that factoring is better, because aiming for a line of credit is useless if you can’t get it anyway.

 

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