The Real Truth about Factoring Loans

Is factoring a loan? This is one of the more confusing aspects of factoring, because it is a way of getting funding for companies which need a loan to stay afloat. It doesn’t help that the term “factoring” can sometimes mean a loan when invoices are used as collateral. These factoring loans are often called “invoice discounting”.

What is Factoring?

So, let’s clarify the issue once and for all. Factoring involves the sale of accounts receivable to a third party finance company, called a factor. As such, it’s not a loan at all.

The factor buys the accounts receivable and in return they pay about 80% of the value of the invoice in advance. If you’re the business with the accounts receivables, you can then use the advance money for a wide variety of business functions—to meet payroll, pay for supplies for upcoming projects, or pay for debts that need immediate servicing. Once your customers pay the full amount of the invoice, the factor then forwards the money to your business after it has taken out the fee for its services.

Since factoring involves the sale of the invoices, the factor is paid directly by the customers.

Advantages over Other Forms of Financing

So why has factoring suddenly become so popular among many small businesses? The reason is simple. Ever since the most recent economic crunch, banks have become a lot more hesitant to lend to small businesses. The small amounts of loan needed by small businesses take a lot of effort to process, but the potential profit is too little. Also, the risk is often deemed too great by traditional banks.

That is how factoring became popular. Factoring has already established itself in several industries (most notably the garment industry) but of late it is now a recognized alternative form of funding for just about every industry. Factoring has a much higher approval rating than traditional loans, and the entire process takes very little time in comparison.

Factors don’t really much care about the credit of your company. Instead, it matters more to them that your customers have a good credit history. So if you have reputable customers, you can get the funding you need through your accounts receivable.

Another benefit is that with so many factors offering their services, you can pick out the best option. Perhaps one factor offers a much higher advance than average, as some claim to offer advances of up to 90% of the value of the invoices. Others offer lower fees so that when you get the rest of the money when your customer pays in full, your profit margin is not as reduced as it would be with other factors.

Some factors offer long experience in your particular industry, so that they know which of the potential customers have the best track records for paying fully on time. Others brag about excellent collection services, so that your customers are not alienated when they have to pay a factor instead of your company.

Nowadays, banks have come to recognize that factoring is already considered a perfectly acceptable form of funding, which is why many factoring companies are owned by banks as well.

 

How to Get Working Capital for a Service Company

A service company needs a lot of working capital in order to operate efficiently. Meeting payroll is of course crucial, since your workers are your most important assets. They’re the ones providing the services in the first place.

Then you’ll need working capital for training your workers. They will need to replenish the supplies they use up, and often you will also need to rent or buy equipment so they can do their job. And not to mention, your entire enterprise needs an office, a website, and utilities.

So how can you get the working capital you need for all these expenses? This is a real problem, especially when your customers take more than a month to pay for the services you’ve provided.

Here are some of the usual methods:

  1. Borrow money from friends and family. This form of financing offers several advantages, including low interest rates and of course a speedier way of getting the money you need. But there are also disadvantages, especially if you have trouble repaying the loan – you risk damaging your personal relationships. Another disadvantage is that you may earn a reputation for “neediness” among your other friends and family, especially if your lender isn’t mindful of your need for confidentiality.
  2. Credit cards. If you can make the minimum payments on time and your expenses aren’t that big (especially when you are the sole service worker), then perhaps this is a viable option. It’s quick and easy and the minimum payments are not all that hard to make. But this also affects your credit, and if you suddenly find yourself unable to pay the minimum payments then the interest rate can be very damaging.
  3. Traditional bank loans. This is usually a good method to try if you have a good relationship with your bank. But the problem with bank loans is that the approval rate is basically 50/50, and the processing of the loan takes too much time. You’ll need to ask for the loan long before you really need the funding, or else it may come too late.
  4. If the fact that your customers don’t pay right away is giving you working capital problems, then this can be solved through factoring. This method of payment gives you an advance of up to 80% of the value of the invoices, and that money can serve as your working capital for future business. The rest of the money will come to you once your customer pays the factor in full, minus the fee of the factor.

The main advantage of this method of funding is speed. You can get approval quickly, the advance comes to you immediately. You can then use that money right away. But keep in mind that with the interest rates, you need a decent profit margin for this to work.

With small service companies, other methods of funding such as crowdfunding and selling a piece of the company to venture capitalists may not be practical. But what’s obvious is that you have lots of options aside from just a traditional bank loan. By learning how to get working capital for a service company, you can make sure you can provide service even when your customers take a while to pay you.

Factoring for the Manufacturing Industry

Since the turn of the millennium, the manufacturing industry in the US has taken a turn for the worse, and the last economic crunch didn’t help either.

The number of manufacturing jobs decreased by 5.1 million from 2001 to 2012, and 2.1 million of those jobs were because of the US-China trade deficit. But now some experts are calling for an increase in US manufacturing. That can only happen if there’s enough funding. Fortunately you can now turn to factoring for manufacturing companies.

Why Funding Should Be Increased for Manufacturing

There are several proposed reasons why manufacturing should be more concentrated in the US, aside from the usual talk of providing more jobs for Americans.

One reason is that in terms of dollar output per worker, the American worker is still much more productive. US customers also expect quicker delivery, and having the manufacturing done in the US cuts down on the cost of keeping large amounts of inventory. Finally, separating manufacturing from development has proven detrimental to the training and education of company workers.

For all these reasons, funding should be afforded to manufacturing companies. And if banks are hesitant, the factors are not.

Factoring for Manufacturing

The way factoring works for manufacturing companies is easy enough to understand. The manufacturing company often has customers which take their inventory but takes too much time to pay in full. That often leaves manufacturing companies in a cash crunch and why they may need a loan for working capital.

Factors can offer the funding when banks don’t give out loans. Factoring involves the sales of accounts receivable, and the factor advances up to 80% of the value of the receivable to the manufacturing company. The factor is them paid directly by the customer, and when the customer finally pays in full the factor forwards the rest of the payment after it has taken off the advance and its fees from the payment.

Benefits of Factoring

The most obvious advantages of factoring are the ease in which manufacturing companies can avail of this form of funding. Approval for funding is easy to get, unlike with bank loans which has notoriously low approval rates.

The entire loan application process is also slow with traditional loans, but with factoring it may only take a few days to get the approval. This is due to the lack of relevance of the company’s credit. Instead, the creditworthiness of the customers is evaluated.

It only takes a few days to set up the factoring line, and then the advance arrives within a day of submitting the accounts receivable.

The money can then be used for a wide variety of purposes. It can be used to meet payroll, maintenance, manufacturing supplies and expenses, or pay for other debts. You won’t have to worry about the bank calling in a loan, because the funding is not a loan in the first place. As long as your customers pay on time, then you’re all set, and your factor can even help identify which of your new customers are good payers so you won’t have problems.

With factoring, you solve a whole factory of problems altogether.

Purchase Order Finance for a Service Company

Purchase order finance for a service company is not really a common option that such businesses consider. Usually when speaking of purchase order finance, it applies to the buying and reselling of goods. Your client wants 1,000 women’s handbags and is willing to pay $100,000 for the entire order if you can deliver them on schedule. Meanwhile, you have suppliers for the handbags which will cost you a total of $50,000. But if you don’t have the resources to pay for the items, a lender can just pay for them so you can fulfill your client’s order.

You get your money when the customer pays the lender. The lender takes the money it spent for the handbags and then gets its fees. If you invoice the customer, then you may also use factoring in conjunction with the PO funding. This is when you get about 80% of the amount of the invoice right away from the lender, and the lender gets another fee for the factoring service when the customer pays in full.

How Does Purchase Order Finance for Service Company Work?

If you are a service company, then purchase order finance can help you in one of two ways. If you are a solo operator and you’re tasked to perform a service, you may need to get PO finance if the service entails the purchase of supplies or the rent of equipment.

For example, let’s say you are a house cleaning service. You may need to buy some cleaning supplies like detergent, while also renting equipment like vacuum cleaners and steam cleaners. If you can’t afford to get those things with the cash you have available, then PO finance will solve your problem.

When you need to pay for manpower, the purchase order may be negotiated to cover payroll for the specific contract (in addition to equipment and supply rent and purchases), and when the contracted service has been fulfilled you can then bill your customer just like in regular purchase order financing.

Benefits of Purchase Order Financing

There are several key benefits to purchase order financing. The first is that you won’t have to pass on any opportunity that gets you profits for your service company. In fact, if you refuse too many purchase orders for services then you may get a rather negative reputation as a company which is severely limited. With PO financing, your reputation remains intact.

In addition, you also get the cash you need much more quickly than if you rely on a traditional bank loan. Bank loans are notoriously slow to get. It’s more likely that your customer will look for another service company rather than wait for you to get the funding you need.

Often purchase order finance for a service company is necessary for growth. You may have the working capital you need to render service to your current roster of customers, but with PO finance you can expand your business and still have working capital available.

How to Get PO Finance in 24 Hours

Managing your own small business can be a very challenging endeavor. At the start you may worry about how to get your business running, and it can take all of your expertise and effort to succeed or even to stay afloat. And then when you suddenly find yourself in a position to grow, you find that circumstances can force you to hold back. But with PO finance in 24 hours, you can still forge ahead and claim the success you’re meant to have.

What is PO Finance?

Let’s say that you have an order to fulfill for a new customer. You’re tasked to deliver 10,000 gadgets to your customer within a given amount of time, and you’ll be paid $100,000 for the entire order if you deliver. You have the contacts and the knowhow to get those 100,000 gadgets delivered on time, and the total expenses will only cost you $60,000.

That means you can get $40,000 in profit. But there’s a big problem. You don’t have $60,000 to begin with.

And that’s where purchase order finance comes in. The finance company opens a line of credit so that the suppliers are paid, and it also usually takes care of the collection of the payment from the customer. Once the customer pays in full, the finance company takes back what it used to pay for the supplies plus a fee for its services, and you get the rest of the profit.

Advantages of PO Finance

The main advantage of PO finance is that you can get the funding much more quickly than if you applied for a loan. In some cases, you can get approval for PO finance in 24 hours. That’s a huge difference from the many weeks you need to get a bank loan.

The reason for the speed difference in the two funding methods is that with a bank loan the bank needs to make sure of your company’s financial ability to pay back the loan. That means lots of paperwork that proves the financial health of your business. In addition, banks also need collateral for their loans as well.

In PO finance, all the finance company needs to know about your company is its ability to fulfill the purchase order. The finance company doesn’t need to know the quality of your credit. Instead, the credit history and the propensity of your customer to pay fully and on time are investigated. All these factors determine the size of the funding.

So if you have a fairly stable and reputable customer, then you can get approval of the funding in 24 hours. Setting up your line of credit is very quick, and a schedule is also drawn up so that the finance company can be assured that you’ll be able to deliver on time.

Because you can now avail of PO finance in 24 hours, you no longer have to turn down purchase orders even if you don’t have enough working capital. You can grow your business if demand for your products increase, and at the same time you can also establish a reputation for meeting orders on time.

Picking the Right 2015 Factoring Company

It’s easy enough to understand why many businesses today would choose to get funding from a factoring company. Often it’s because a bank won’t hand out a loan in the first place! But there are also a significant number of businesses that prefer getting funding from factoring company instead of bank loans. The funding comes much more quickly with factoring, and besides with factoring there’s no loan involved at all.

Choosing to go with factoring is one thing. But choosing a particular factoring company this 2015 is another. You have literally thousands of options and picking the right one can be a rather complicated task. But there are ways to simplify the process.

  1. Choose a factor that comes with recommendations from others in your industry. For example, if you’re running a medical clinic then you may have colleagues who also transact with factoring companies. They can give you a rundown on what it’s like to deal with their factors.
  2. Opt for one with extensive experience in your particular industry. This speeds up the process because these factors are already familiar with your SOPs and particular needs. You won’t have to waste time explaining how and why you do things. They are also often known by your customers as well, so the payment process becomes much simpler too.
  3. Check testimonials to see how they approach your customers when demanding payments. Some industries, such as construction or the garment industry, depend greatly on networking. A factor which is too rude or aggressive in its payment notification procedure may offend your customers and damage the congenial relationship you have with them.
  4. Inspect the rates. A factor advances a percentage of the value of the account receivable to you immediately. Then they forward the rest of the payment when the customer pays in full after taking their fees. You’ll need to know the percentage of the advance, because some advance only 70% of the value of the invoice while some may claim to advance up to 90%.

You also need to check how much they charge in fees for the funding, and what the penalties are if your customer pays late or not at all. Some factors offer smaller fees if an invoice is paid sooner.

Some factors may also be more stringent about the type of customer you serve. For example, one factor may not accept an invoice concerning a particular customer, while another factor may give you an advance on that invoice.

  1. Additional services. Many factors offer free credit checks on your customers, and this can be very helpful when you’re trying to decide if you’re going to offer credit to a particular new customer. Some factors offer a line of credit instead of giving you the advance in full. Other factors can even offer online account management services, so that you can oversee which of your customers are nearing their due dates, which ones have paid, and which customers are late.

Your factoring company choice can very well affect your entire operation. Make sure you choose well, and not just because you were attracted to their advertising copy.

 

 

How to Get Working Capital for a Consulting Company

A consulting company, on the face of it, doesn’t really need a large startup capital, especially in the beginning when they still have very few employees. It’s only when the work gets underway when learning how to get working capital for a consulting company becomes more crucial. Offices have to be maintained, employees need to be paid (even if you’re just the sole consultant in your firm), and of course the networking and advertising expenses must be covered as well.

Figuring out how to get working capital for a consulting company depends greatly on your contacts. This applies directly when trying to get funding, and also indirectly when you’re trying to get clients.

Here are some of the options you need to consider:

  1. Bank Loans. This is of course the standard method of getting working capital funding, but of late this may not be the most ideal option. The crux of the matter is that getting this kind of loan is almost impossible because you usually don’t have much in terms of company assets which you can use for collateral. One way of getting a bank loan for your business is if you are willing to use your own home as security.
  2. Using Credit Cards. This is actually a very popular option. For most solo consulting operations, credit cards have limits which can adequately cover expenses. For best results, you may want to consider getting a separate credit card for your business so that your personal and professional finances don’t get mixed.

This is a viable option if you don’t have an employee such as a permanent secretary to cover. If you do, then this can get very expensive very quickly, as credit card interest rates are usually among the highest in the lending industry.

  1. Equity Financing. This is when you take in a partner who gives you the working capital you need in exchange for a slice of the company. While this is a good way to get funding for growth purposes, for working capital it can truly dilute your future profits. From a long-term perspective, this is one of the more expensive ways of getting working capital.
  2. Immediate billing. Some experts in the consulting industry recommend billing clients on day one. They say that the predictability of this payment process may appeal to clients. In addition, you can charge fees plus 15% for expenses and then agree to reconcile against actual expenses in 90 days. This separates your fees from disputes about expenses.
  3. Invoice factoring. On a more realistic note, it may be more practical to expect clients to want to pay later instead of sooner. Limiting your clientele to just those who can pay upon delivery can severely limit your growth. But then again, that can cause working capital difficulties.

This is where invoice factoring comes in. This method of getting working capital involves getting 80% or so of the invoice amount right away from a factoring company. Then when the client pays in full, the factor forwards you the rest of the pay after they have deducted their fees.

As a consultancy firm, your expenses involve research and meeting payroll for your employees. Certainly marketing and advertising will also have to be taken care of. You can cover all these expenses only if you know where to get working capital for a consulting company.

Working Capital for an IT Staffing Company

The staffing industry is a field that has experienced continuous growth in recent years, and this is especially true for IT staffing companies. Every day more than 2.9 million workers are employed by staffing firms, and over the course of a year more than 11.5 million temporary or contract workers are employed by staffing companies. With IT staffing in particular, the business is projected to grow by 7% in 2015. This makes it crucial that working capital for IT staffing company needs are secured.

The Unique Working Capital Problems of IT Staffing

Working capital for an IT staffing company can be used for two main purposes. The first one is obviously for payroll. Temporary staffers expect to get paid for every week of work. And the more staffers you have as your business grows, the greater the payroll you need to meet each week.

The problem here is that your clients don’t usually pay promptly. Instead, the payment from them comes in after at least 30 days, and some could take as long as 90 days. This means that a staffing company needs to have at least enough money for 13 weeks if it is to continue its operations.

Staffing companies also have overhead costs, aside from the cost of having to screen suitable IT workers for their clients. Sometimes, the staffing company may even have to provide additional training for its employees.

But there’s also the problem of a company hiring temporary workers and then not paying the bill for those services at all. This happens in the industry, unfortunately.

How Invoice Factoring for IT Staffing Companies Solve These Problems

It’s often been said that invoice or accounts receivable factoring can be an attractive alternative to traditional bank loans. This type of funding doesn’t need security aside from the invoices themselves, and the chances of getting the necessary funding is very good compared to a traditional bank loan. And even when you get a bank loan, the entire process can be interminable, unlike invoice factoring when you know if you get the funding or not within a few days.

So if you’re unsure of meeting payroll for the week, you can get the funding you need right away and so avoid having to miss out on paying your own staff. In factoring, you can get as much as 80% of the value of the invoice right away, so you can pay off your employees promptly and also pay for overhead.

But invoice factoring offers other unique advantages when used to secure working capital for IT company needs. For one, staffing companies don’t need to hire additional workers to collect payments from clients. Often, this task falls on the lender instead. Factors can even investigate new clients to see that they’re in good financial health and that they have a good history of paying staffing companies on time.

In factoring, working capital can be secured quickly and other conveniences are also offered.

Invoice Factoring Rates

In invoice factoring, you can get an advance from a factor that’s equivalent to a percentage of the value of your invoice. With this advance, you will have some working capital to use instead of waiting for the invoice to become due.

When you compare factoring companies, you’ll need to compare their invoice factoring rates. The main problem is that different factors call their fees by different names, even though they may refer to the same type of service or fee.

Essentially, if you are doing comparisons you will have to get an exact quote on how much the funding will cost you. All the fees must be transparent before you sign an agreement. You’ll need to know exactly how much you’re getting in advance for whatever circumstances, and the fees of the factor must be stated up front. The conditions for the fees (and penalties should your customers pay late) should be clarified as well.

The invoice factoring rates you’ll need to be aware of include:

  • This is the percentage of the value of the invoice. Some factors claim that they offer 70% of the value, while others say they offer up to 90% or even more. You’ll need to know if the advance rate is the same for all invoices or if there are some types of invoices which may come with a lower advance rate. You also need to check if the advance rate applies to the full worth of the invoice or if it applies to the net of VAT amount.
  • Advance limit. This is the maximum amount that a factor may be able to give in advance for an invoice. So if the factor has a limit of $100,000 for each invoice, then even if they offer an 80% advance you only get the $100,000 even if the invoice is worth $200,000.
  • Discount charge. This works like interest on a loan. It can be a fixed percentage or a few percentage points over the base rate or the prime lending rate.
  • Additional fees. Some factors also charge additional “administrative fees” which may include setup fees, fixed annual fees, fixed annual fees per invoice, legal costs and extra percentage fees as well. For example, they may charge additional fees when they investigate the credit of your new customers. You may also be locked in a factoring contract, and opting out of the factoring service may require another fee.

What Affects Invoice Factoring Rates?

Every fee must be taken into account before you choose a factoring company to work with, although many factors are open to negotiation. Several considerations can increase or reduce the rates you pay. The info that affects the rate includes:

  • Whether your customers are local or international
  • The sales volume (per month or year)
  • The average size of an invoice (the larger the size the lower the fee should be)
  • The maturation of the invoices (whether the customer pays in 30 or 60 days)
  • The creditworthiness of your customers

It’s said that invoice factoring rates can be more expensive than traditional bank loans. But then again, banks loans are nearly impossible to obtain, while invoice factoring is much easier and faster. For some businesses, that’s a fair trade.

Is Factoring One Invoice Possible?

Let’s suppose you have your own business and you’re running out of working capital. But you are awaiting payment for one large invoice which can very well solve all your current financial problems. Is it possible to factor one invoice?

While you have a lot of single invoices worth thousands of dollars each, you have this single invoice that’s worth $200,000. But your problem is that you need the money now and not in 30 days.

Banks can’t save you because they take too much time to process loan applications. Besides, a bank loan is all but impossible when you have no other assets to use as collateral.

But you can use factoring. And even though factoring usually entails getting advances on invoices on a continuous basis, some factoring services offer spot factoring, which may involve factoring one invoice only.

How Spot Factoring Works

Essentially, it pretty much works like a typical factoring service. The factor buys the invoice from you, and then offers you a certain percentage of the value of the invoice as an advance. When the customer pays in full, the factor takes back the advance and the fees it charges from the customer’s payments and then forwards the rest to you.

Pros of Spot Factoring

Spot factoring, like other forms of factoring, is much easier to get than a bank loan, and the entire application process is much simpler and faster. With factoring, you can get the money you need quickly, so that you can meet payroll, service your most expensive debts, or take advantage of growth opportunities.

But spot factoring does have several advantages over regular factoring.

Here, you’re not forced to hand over all your invoices for factoring. You can choose which invoices or even which single invoice to factor. Since it can mean you only need the factoring service once, there are no locked in contracts to worry about. And that means there are no break fees when you leave a factoring service.

It’s this flexibility which can greatly appeal to small business managers. Perhaps you can pick the invoices with the largest value, or the ones which take a long time for complete payment.

Administrative fees may also not apply. For example, some factors charge annual fees, and this may not be applicable for spot factoring.

You may also maintain most of your customer relationships because customers pay you directly, unlike in factoring when your customers pay your factors directly instead.

Cons of Spot Factoring

Perhaps the most obvious drawback to factoring one invoice is the cost of the advance. Some factors may charge up to 30% of the value of the invoice. That can really cut down on your profit margin.

Deciding whether spot factoring is right for you depends greatly on your circumstances. It probably works the best only if you have a single invoice that is worth a lot more than your average invoice. If that’s not the case then what you really need is selective factoring. This is when you pick which of your invoices which will be factored. But if you keep on needing more capital on a regular basis then you may as well go for regular factoring, which will cost you a lot less.