Factoring: A Loan That Will Not Affect Business Credit

Factoring: A Loan That Will Not Affect Business CreditWhen it comes to starting a business, you often use your own money as startup capital. But sooner or later you’ll need additional funding, and that usually means having to take out a from a bank or using your credit card. But these methods of funding can really mess up your credit, especially when you have problems paying on time. That’s why you’ll need factoring: a loan that will not affect your credit.

How Loans Can Help your Credit

For the most part taking a loan can help your credit. Your credit score reflects your ability to pay back a loan. The higher your score is, the more likely it is that you’ll pay back a loan in full and on time. And that’s why banks often prefer borrowers with excellent credit.

You don’t get an excellent credit score if you’ve never had a loan in the past. That’s because you don’t have a history of paying a loan on time. By taking out a loan, you therefore give yourself the opportunity to prove that you can pay back what you borrow. So if you don’t borrow, you don’t prove anything. It’s ironic, but a millionaire who has always dealt in cash will probably have poor credit.

How Loans Can Hurt Your Credit

Loans, however, can be risky for your credit. For one, you can’t take out too many loans. All your loan applications are noted, and when you apply to many credit card companies, for example, then your credit will take a beating.

Then there’s also the problem of paying back a loan on time. Once this becomes a problem for you, your credit score will tank as well. And when that happens, you may no longer be able to get any more loans.

Factoring and Loans

In a way, factoring is a loan. You get money in advance and then you pay for that service. It’s like paying interest.

But at the same time, factoring has nothing to do with your credit. That’s why you can avail factoring even if you have poor credit. Factors give you advance money in exchange for your invoices, and in return it gets its fees once those invoices are paid in full.

But there’s no actual loan when you deal with a factor. After all, you’re not borrowing money – you just get your money in advance. And you don’t pay the factor. Your client does, which is why your client’s credit is evaluated and not yours. And because your credit doesn’t matter, there’s no inquiry of your credit. With no inquiry, there’s no effect on your credit.

Alternative Funding Sources

Of course, factoring is not your only alternative to expensive credit card cash advances and hard to get business loans. There are other ways in which you can get more funding for your company. But you will find factoring can help you in ways that other funding methods can’t. And you can be sure that your credit rating won’t be affected in any way. That’s the beauty of factoring: a loan that will not affect your credit.

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A Working Capital Loan Will Generally Not Affect Working Capital

If you don’t have enough working capital to meet payroll or pay your suppliers, then as a business owner you’re going to have a problem. A working capital loan can help but it really doesn’t improve your working capital at all. In fact, a working capital loan will generally not affect working capital.

Clarifying the Issue of “Working Capital”

If the title of this article doesn’t make sense, then let’s clarify the issue. Working capital is actually a technical term, and it’s defined as your current assets minus your current liabilities. Your current assets don’t count any fixed assets, but rather those items (such as invoices and inventory) which can be easily converted into cash. Your current liabilities are those which you need to pay for in the near future, so any long term loans don’t count.

So if you get a working capital loan, you get cash which makes it a current asset. At the same time, your current liabilities increase by the same amount. So there’s really no difference at all when it comes to your working capital.

However, keeping track of your working capital can be important. For example, you can tell that something’s wrong if your working capital is decreasing over time. It can also tell you if you are making good use of your assets.

If your working capital is negative (your current assets is less than your current liabilities) then you need to get more working capital right away. But if you have too much working capital (such as if your current assets are more than twice the value of current liabilities) then you may not be investing your extra cash properly or you have too much inventory.

So What Affects Working Capital?

So if a working capital loan will generally not affect working capital, what will?

  • Your net income. This is your standard source of working capital. You exchange your inventory for a price that’s higher than the cost it took to manufacture it. Since the cost (liability) is less than the price (asset) you will get more working capital.
  • You bought fixed assets. If you buy fixed assets like equipment, then you use your cash which is a current asset for something that’s not a current asset. This is one of the uses of working capital.
  • You paid off a long term debt. This is another use of working capital, as a long term debt is not a current liability.
  • You have a long term debt. This is one way of increasing working capital, because the loan doesn’t have to be paid in the near future.
  • You sold a fixed asset. Perhaps you sold some equipment you no longer use, or a building you no longer need. This also increases your working capital.

Working capital is meant to be used. You need enough to operate and grow, but having too much means you’re not using it properly.

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The Need for Food and Beverage Industry Working Capital Line of Credit

The Need for Food and Beverage Industry Working Capital Line of Credit
The Need for Food and Beverage Industry Working Capital Line of Credit

The food and beverage industry these days are facing some financial challenges. Often, for a company to stay afloat, there is an urgent need for a food and beverage industry working capital line of credit.

What Will the Working Capital Be Used For?

There are several key issues that companies in this industry must address. These are the issues which the lender of the line of credit must also be familiar with.

  1. The business tends to be seasonal and cyclical. There are peaks and troughs in the business cycle, and this means that sometimes working capital can be problematic because the revenue stream is not as strong. Lenders should also be aware of this as this affects loan payments.
  2. The need for research and innovation. The consumer public is affected by trends, and often new technology can spark a new trend that can provide an advantage for a company over its competitors. This is another area where working capital is needed.
  3. Labor costs are increasing. This is another drain in the cash reserves of a company in the food and beverage industry, because it is difficult to pass on the costs to the consumer public.
  4. Commodity hedging. Companies in this industry are reliant on the commodities market for their pork, cattle, and orange juice supplies. A lender who can provide expert insight on the matter can be invaluable.
  5. Devaluating inventory. Some products such as cars and gadgets tend to lose value over time because of technological developments. They eventually become obsolete. But in the food and beverage industry, the inventory literally has an expiration date. Lenders must be aware of this reality, and they must be flexible in their terms.
  6. Capital expenditures. Here is where working capital is absolutely necessary. Equipment must be maintained and repaired if the operations of a company are to continue.

Where to Get the Working Capital

So how can you get a food and beverage industry working capital line of credit? There are several methods recommended by financial experts. One, of course, is by obtaining a line of credit from a bank. This approach, however, can take a long time and approval is not always likely. In addition, the requirements can be very difficult. You’ll need an excellent credit history, and your financial statements should demonstrate several years of profitable business. You’ll also need to put up collateral as security for the line of credit.

Another method that’s gaining ground is factoring. With this option, you sell your invoices to the finance company and in return you get something like 80% of the value in advance to cover your operational needs. When your customer pays the factor in full, you get the rest of the payment after the factor has taken out its fees. The advantage of this approach is that your credit history is irrelevant and you can submit just the invoices that can cover your working capital needs.

Either way, the need for a working capital line of credit is crucial for your company to survive.

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Factoring for Technology Staffing Firms

factoring for technology staffing firms If you run your own technology staffing firm, sooner or later you may run into some problems with your cash flow. Most of your overhead is payroll since you are in the business of providing companies with workers. Each one of those workers usually expect to receive their wages on a weekly basis. But the problem is that your customers will often pay after 30 days. Some may even pay after 60 days. And that’s why factoring for technology staffing firms can be a lifesaver.

How It Works

You can add funds to your cash reserve and boost your cash flow easily with factoring for technology staffing firms. The way it works is simple. The factor takes your invoice and verifies it. You probably have your clients sign the time cards for the billing process. The factor just checks the credit of your client, and then it checks the time cards.

Once that’s done, you can get up to 80% of the value of the invoice right away instead of waiting 30 or 60 days. The percentage may vary depending on the factor. You can then use that money to cover your payroll and other operational expenses. The factor tracks the invoice and does the collecting. When the client pays in full, you get the 20% back minus the fees charged by the factor.

With this process, you can factor just enough invoices to cover your needs. Your other invoices can be untouched. You can then slowly build your cash flow so that you no longer need the services of the factor.

Long Term Factoring

Some companies, however, prefer to actually do business with factors for the long haul. That’s because factors offer services that prove valuable, especially for staffing companies. For example, the matter of collection is handled by the factor. That means you can just focus your efforts on providing the right manpower that your clients are looking for. You don’t have to bother hiring employees to take care of collections. That even saves you more payroll expenses.

Factors can also track and manage your accounts receivable for you. This means you’re also spared from having to hire and pay a receivables clerk to manage the accounts receivable.

Then there is the matter of credit investigation. Factors check that the credit rating of your clients is good, because they don’t want problems in collecting payments. The factors also make sure that your new clients have a good reputation in paying their invoices on time. With their help, you will know which clients have the habit of paying late or won’t pay at all.

Choosing a Factor

It matters which factor you deal with so that you can maximize the benefits you get. The best ones will offer the highest advances and the lowest fees. They are familiar with the industry and they already know which clients are slow to pay or don’t pay at all. Your factor should also be professional when they collect the payments from your clients.

Choose the right factor, and your cash flow problems will be solved.

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Should You Use Asset Based Lenders in Florida?

Asset Based Lenders in FloridaYou need money to make money. That’s true in Florida and anywhere else in the world. For the most part, you will have to start by putting your own money but that may not be enough. Fortunately there are several other ways you can get financing in Florida.

Right now, the banks in the state are becoming more amenable to lending. They’re growing their loans at double the national rate. But should you consider approaching asset based lenders in Florida?

What Are Asset Based Loans?

These loans are a type of finance which use assets as collateral. In general, these assets are usually either your accounts receivable or your inventory. You agree on a percentage with the asset based lenders in Florida, and you get an advance on the value of your asset. That’s usually 70% for the receivable, but in a few cases up to 90% may be offered. For completed inventory, the percentage is usually 50%.

Essentially, what you’re doing with the loan is getting your own money in advance than waiting for the money to be paid to you.

Applying for Asset Based Loans

Quite a lot of financial institutions offer this type of loan in Florida. But it may not be as easy for you if your company is relatively new. It may also prove easier to apply for a larger loan than for a smaller one, because it costs the bank the same amount of money to monitor a large asset-based loan.

If you want to apply for an asset based loan, your business should have good financial statements and reporting systems, along with easy-to-sell inventory. You also need customers who have a good reputation of paying their bills on time. You will need financial statements that are accurate and detailed. They have to look professionally prepared so that you can show that you’re on top of your business. You also have to convince the asset based lenders in Florida this is a viable loan.

Pros and Cons

There are advantages and drawbacks to securing asset based loans. On the bright side, these loans can be the key to help your business overcome temporary hurdles or to give you the money you need for growth. Asset based loans can provide the capital for businesses that are recovering from a slump, insufficiently funded, experiencing rapid growth, or highly leveraged. These loans are perfect for those whose cash flow is affected by industry or seasonal cycles.

On the other hand, the likelihood of getting the loan approved depends largely on the quality of the accounts receivable. The advances you may get may only come from receivable which have a high credit rating or pay in less than 60 days.

The interest rate may also be higher than traditional loans, and usually your customers will pay the money directly to the lender.

So should you opt for asset based loans? That’s entirely up to you. But if you need the capital then this option must be considered.

 

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The Advantages of Working Capital Factoring Lines

Most small business owners appreciate the value of working capital. Having the funds to pay for rent, for utilities, office supplies, and payroll is essential. Business owners also use their working capital to pay suppliers so that they can have the raw materials needed to create the products that their customers want. Without working capital, their operations cannot continue and their business suffers. And that’s why working capital factoring lines are crucial for many businesses today.

You have several ways of getting the working capital you need. But here are some of the main reasons why working capital lines may be your best option:

  1. You can borrow only the amount you need. When you have your own business and you need a working capital loan, you need to borrow a specific amount of money. So that means you have to make an accurate estimate as to how much you need. For example, if you borrow $100,000 and it turns out that you actually needed $120,000 as working capital, then you’ll have to take out another loan. This can put you in a bad strait since loan applications tend to take a long time and the need for working capital is usually urgent.

On the other hand, if you borrow $100,000 and it turns out you only need $70,000 then you’re paying interest on the $30,000 that you don’t need.

With a line of credit, you don’t have to worry about any of these. Your lender can give you, say, $200,000 line of credit and you can only get the amount you need at any given time, and they will just charge interest on the amount you use. So, even if you have a $200,000 line of credit, if you use $120,000, then you will only pay interest for this amount.

  1. There are no arbitrary limits to the working capital factoring line. You are limited only by your volume of sales. So that means if your accounts receivable have a value of $1 million, then you have a potential factoring line of $700,000 to $900,000 depending on your agreement with the factor.

In contrast, a bank line of credit has a ceiling, and you have to reapply if you want that ceiling raised because your current line of credit is unable to match your working capital needs.

  1. Applying for a factoring line is quick and easy. When you apply for a line of credit from a bank, the entire process can be interminable. This is not good, especially when you need working capital. And that’s if your application is approved. Too many banks nowadays seem to loan money only to those companies that seem not to need the money in the first place!

For factoring lines, the application and the setup can be very quick. A crucial requirement for working capital.

  1. The total fees you pay for the factoring services are much lower than what you have to pay in interest for credit card cash advances. Credit card companies can charge an outrageously high interest rate for the money you borrow.
  2. You don’t need a good credit to take advantage of factoring credit lines. This is in stark contrast to banks or credit card companies, which usually won’t provide a line of credit unless you have a high credit score.

So if you have some accounts receivable, you can deal with a factor and get your line of credit right away.

 

Construction Factoring for California Businesses

California has the 9th largest economy in the world, and Moody’s expects the state to do well in the near future. California added new jobs in 2013 at a faster rate than the country’s average. The housing market is recovering, and California added more construction jobs (31,500 new jobs) in 2013 than any other state. And this growth has fueled the need for construction factoring for California businesses.

The Need for Additional Financing

Contrary to popular belief, additional financing isn’t just a way for companies to stay afloat during the lean periods. The additional financing can make it possible for construction companies to take advantage of growth opportunities.

Construction companies may bid for contracts, but they must also make sure that they have the working capital they need in order to fulfill their contracts. Construction companies have many expenses to pay for. They need to meet payroll on a weekly basis, they have to buy various supplies, and they often have to rent expensive equipment.

The need to fulfill a contract is paramount, as your reputation will suffer or soar depending on your performance. It’s this risk which has prevented some construction companies to refrain from accepting some contracts in the first place. They feel that they don’t have the required working capital to fund these projects.

Banks Won’t Help

The problem is that banks are not exactly clamoring to help construction companies obtain the funding they need. After all, California lost more than 1.4 million jobs during the recession, and those jobs have not yet been recovered. Banks today are more cautious—their application process takes a very long time, the requirements are much more stringent for loans, the approval rates for loans are basically fifty-fifty, and you may only get a fraction of the amount you ask for.

Construction Factoring as a Viable Alternative

So what can you do? If you have completed some previous construction projects but your clients have not yet paid in full, you can use your accounts receivable to bolster your cash reserves so that you can fulfill new contracts. You don’t have to count that money out. Instead, you can get your money in advance so that you can use it for your working capital.

That’s how construction factoring works. The factor takes your invoice and then advances you about 80% of the value right away. The percentage may vary depending on your situation and your factor. The factor does your collections for you, which also relieves you of the need to set up your own collection department and thereby reducing your expenses. Once your previous client pays the factor in full, you get the rest of the payment minus the fee charged by the factor.

With construction factoring for California businesses, you can have the opportunity to grow your business at a faster rate than you ever had before. Unlike bank loans, factoring has a much higher approval rate, and the entire process to secure much needed funding is much faster. You will get the money you need quickly, and that will enable you to expand your business.

Fulfill Christmas Purchase Order with Adequate Working Capital

Christmas season is a busy time for retail stores and wholesale companies, and it can get very stressful. People are in the mood to buy, and businesses must make sure that they can accommodate the demand sufficiently. Christmas sales can increase the annual revenues tremendously, but the ability to fulfill Christmas purchase order properly is not always a sure thing.

Potential Difficulties in Fulfilling Large Purchase Orders

In some ways, a large purchase order is a dilemma. It is both a risk and an opportunity. It’s an opportunity to earn more money for the year, yet at the same time the inability to fulfill a large purchase order can easily damage the reputation of your business.

The many problems associated with large purchase orders include:

  • Arranging for suppliers to meet the volume required in the order
  • Hiring more personnel to do extra work
  • Making sure that distribution channels function smoothly
  • Being able to pay for every operational expense

Essentially, you need a healthy amount of working capital to make sure that you are prepared for every eventuality.

The Problem with Traditional Bank Loans

If you’re like most small business owners, your first thought would probably be to secure some form of working capital financing from your bank. But this is not always your best option. Among the most significant drawbacks of applying for a loan is that banks take a very long time to process loan applications. After all, they have lots of clients to help, and they have to investigate your business thoroughly before they lend you the money you can use for your operational expenses.

And even after all the time you spent on applying, the chances of actually getting a loan aren’t exactly good. For loans amounting to less than $100,000 banks offer a paltry 46% approval rate. To qualify for a loan, your credit must be spectacular and your collateral should be noteworthy. And you may not always get the amount of money you need—you can ask for $200,000 in loans and the bank may offer you $40,000 instead.

Common Alternatives to Traditional Bank Loans

So what can you try instead? Today, two of the more popular options include invoice factoring and purchase order financing.

For example, you may actually have the working capital in theory, except that your previous retailers have not yet seen it fit to pay you for the supplies you have delivered them. Your suppliers may ask you to pay them in 10 days, but some retailers may pay you in full in 90 days. That means your money is tied up in those invoices.

With invoice factoring, you get your money immediately. The factor advances you the money (anywhere from 70% to 90% of the value of the invoice) so that you can use that money to buy supplies for your holiday purchase orders. The rest of the money (minus the factor’s fees) will be turned over to you once the retailer has finally paid in full.

You can also fulfill Christmas purchase order by using that purchase order to obtain financing. A finance company may also advance you a percentage of the value of the purchase order so that you can have the money you need for your supplies. With these sources of funding, you can make sure that it’s going to be a Merry Christmas for everyone.

 

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