A Bird in the Hand is Worth Two in the Bush

factoring invoices, factoring company
Accounts receivable financing is like that. It gives you ready cash now and removes the risk that you might not be able to obtain the full amount at some later date.

There is a story behind this famous English idiom which dates back to the 17th century.

The gist is that a sure thing right now beats a promise of better things in the future.

 Accounts receivable financing is like that. It gives you ready cash now and removes the risk that you might not be able to obtain the full amount at some later date. And it’s that uncertainty that can disrupt your company’s strategies.

All bank loans require some form of collateral. In most cases, it’s the item itself for which the money is advanced. So if take out a mortgage so that you can buy a house, then the house itself is the security. If it’s for a car or a boat, then the same principle applies.

 

The title on the item, that piece of paper that shows that you are the rightful owner, is held by the bank so that if you are unable to repay the load, then can sell that security and get their money back.

 

Sometimes, banks will loan what they decide is the value of the item, regardless of how much you have paid for it. And in the case of a house, they normally require you to have some skin in it, to the tune of about 20% of the purchase price. In that way, they feel that you are more likely to honor your commitment because if you failed to do so, then you would lose not only the house, but your money as well.

 

I’ve reminded you of how bank loans work in order to help you understand the benefit of using accounts receivable financing instead. Instead of borrowing against your invoices, you can sell them instead. In other words, it’s a sale, rather than a loan. That means you won’t have to pay it back, ever.

The accounts are sold at a discount. The seller gets ready cash, and the buyer makes a profit on the debts when they are fully paid. It can be a win/win for both parties.

If the debts are old, then the value of the accounts is likely to be less than if they were current. That’s because they tend to be more difficult to collect. Each company will have its own policies for this, and you should check with yours beforehand.

 

The “bird in hand” is cash today. The “two in the bush” are found in the hope that you might be able to collect the full amount in the future.

 

Let me ask you something.      Is it worth the risk?

 

Rather than write off the outstanding debt now and receive nothing, wouldn’t you rather get something for it instead? Wouldn’t you prefer to shift that risk onto another firm?

 

When you’re bills aren’t paid, it’s difficult to concentrate on the really important things. But, if you sell your accounts receivable, that will free up your mind for what matters the most.

Factoring for Opportunities

 

I want you to imagine for a moment that everything is going exactly the way you had hoped in your business.

Factoring Opportunities
Firms need to have the flexibility to draw on additional funds so that they can take advantage of the opportunities as they arise.

Your order book is full. Your cash flow is healthy. Your customers are happy. Even your employees are happy.

Then, a prospect approaches you. He’s impressed with your innovation He has seen the quality of your work. He likes the fact that you always deliver on time. And now he wants to give you a contract that is too big for your current operation.

What do you do?

Your first thought might be to approach a competitor and join forces.

But, let’s add a wrinkle to that scenario.

Suppose that the contract is so sensitive that your prospective customer is willing to give it to only one company? In other words, you won’t get it all if you need to recruit another firm to help you out?

These examples are just two of many of the kinds of opportunities that may come your way.

Entrepreneurs from Eastern Europe, Ukraine, and south-east Asia have come to the West, not only to learn about business, but also to do it.

And as you know, the state of the economy in recent years has made it harder for companies to turn away business, even if it really isn’t what they are tooled up for or prefer to do.

So that means that firms need to have the flexibility to draw on additional funds so that they can take advantage of the opportunities as they arise.

That’s easier said than done, because traditional funding options normally aren’t accessible as quickly as they need to be in such situations.

Families tend to be strapped for cash. Banks have forgotten how to loan money to business, especially SMEs. Business angels or venture capital companies might be interested, but usually there needs to be an established relationship in place in order to raise money in a hurry.

And even when such an association exists, if they’ve already invested in you, it’s unlikely that they will be willing to advance another tranche to you, no matter how great the potential, because it will increase their exposure.

And so it’s really down to you.

To be sure, the best companies maintain a contingency fund. Five to ten percent of your annual costs is probably a reasonable sum to have in your reserves. But, that money is there to cover unforeseen expenses; not to use for an untested or unexpected opportunity.

And since you already know that no business deal is immune from contingencies in any case, why would you risk everything on one opportunity?

The sensible thing, of course, is to raise the cash you need in another way.

And that’s where factoring can come into its own. Instead of using it as a stop-gap to forestall unpleasant consequences, you could use the same service to enable you to capitalize on new business opportunities. And once you’ve taken advantage of one, you’ll be encouraged to compete for the others.

Types of Factoring Business

Types of Factoring Business

If you are contemplating the possibility of availing the services of a factoring business, then by now you know that invoice factoring (also known as “business factoring”) is one way of quickly providing your company with working capital. Factoring is a business transaction, during which your company gets instant cash by selling its accounts receivable invoices to a factoring firm at a discount.

There are generally two types of factoring services you can avail. The right factoring service for your company depends on who is held liable for the debts when some customers are unable to pay. The two types of factoring to consider are (1) recourse factoring and (2) non-recourse factoring.

non-recourse factoring, recourse factoring
There are generally two types of factoring services you can avail. The right factoring service for your company depends on who is held liable for the debts when some customers are unable to pay. The two types of factoring to consider are (1) recourse factoring and (2) non-recourse factoring.

Recourse Factoring

This type of factoring is usually more preferable because the cost is generally less. The lower cost is due to your company’s decision to still shoulder the burden of bad debt instead of passing the risk to the factoring company. Because the factoring company does not take on the risk, your company should get this agreement rather quickly, as the factoring company should have less stringent rules regarding your business systems. The factoring company will also be less stringent about the payment history of your clients.

After the agreed upon time—usually 60, 75, or 90 days—your company is required to buy back the invoice from the factoring company if the customers are unable to pay. Recourse factoring is recommended if your customers are reliable about the payment, because if many of them are unable to pay then you would have to return the money paid to you by the factoring company, with the standard fees and interest.

Typical Non-Recourse Factoring

Most factoring companies define non-recourse factoring to mean that your company has no further liability for the unpaid invoice should a customer become unable to pay due to insolvency. If the customer declares bankruptcy and becomes unable to pay after the appointed time (usually the same period of time as recourse factoring), then you are under no obligation to return the advance you received from the factoring company. However, if the customer won’t pay the invoice for any reason other than bankruptcy, then even with the non-recourse factoring agreement in place the factoring company will require your company to buy back the invoice.

 

In this type of non-recourse factoring, the factoring company shoulders the entire risk of unpaid invoices. If for any reason the customer is unable or unwilling to pay the invoice—they don’t have to be insolvent—then the risk falls on the factoring company. If the debt cannot be collected, the loss is on the factoring company.

The sole exception to this is when the customer disputes the invoice; for example, the customer refuses to pay because your company is accused of not providing the service or product properly. Because the factoring business is outside this dispute between your company and the customer, then even with this version of the non-recourse factoring agreement you will still be required to buy back the invoice.

This type of factoring is usually more expensive and a factoring business will typically charge about 2-5% more, because of the additional risk involved.

Factors That Affect the Cost of Hiring a Factoring Company

By: Chris Lanchech

discount fee, factoring company, cost of factoring
A factoring company can be the best solution for your company’s financial needs if your business currently requires a very quick infusion of cash.

A factoring company can be the best solution for your company’s financial needs if your business currently requires a very quick infusion of cash. Factoring companies can advance you the money owed by your customers, for a fee. This fee is called the discount rate, as it is the percentage of the face value of an invoice.

Generally, the discount rate can range from 1% to as much as 5% of the value of the invoices you submit to the factoring company. The discount rate is affected by several factors, including the following:

Factoring Service Fees

Some factoring companies may require their clients to pay a setup fee to avail of factoring services. These fees commonly range from $500 to $2000, which may help offset the costs, time and effort of running credit checks, assessing the customer’s ability to pay his debt, and validating the invoices. However, there are some factoring companies which do not require setup fees.

Your agreement with a particular factoring company also specifies if you are availing of recourse or non-recourse factoring. Non-recourse factoring is more expensive, as it allows you to pass on more of the risks of unpaid accounts.

Your Industry and Clients

The type of industry your business is in can affect the discount rate offered by factoring companies. Some industries involve more risk when collecting money is involved, and examples of these include the garment and textile industries.

If your industry is considered a high-risk field by factoring companies, then the costs for your company may be greater. Factoring companies may demand a higher discount rate as their fee, and they may even put a cap on the total money they may advance to your company.

Some clients are also riskier for factoring companies. Just as your personal credit rating and history is crucial for securing a loan and determining the interest rate, the reliability of your customers may also help determine the discount rate that factoring companies require. If your customers have a spotty repayment history and credit rating, then the discount rate invariably increases.

The Number of Invoices You Submit and Type of Billing

The greater the number of invoices you submit to factoring companies, the greater their workload becomes. Consequently, the discount rate will also increase.

A sum total of $100K in accounts receivables will come with a higher discount rate if it involves a hundred accounts of a thousand dollars each. But if that sum total involves just two accounts of $50K each, then the fee may be significantly lower, because the factoring companies do not have to contact as many customers to collect the money owed.

The method in which customers use to pay their accounts will also be a factor in determining the discount rate. If progressive billing is involved (in which customers pay in installments instead of paying in full at once), then the discount rate increases because the factoring company has to do more work.

 

 

Factoring is a sensible way to keep the tax man away

BY: Chris Lanchech

I’m sure that you’ve heard the old saying that there are only two certainties in life: death and taxes. And to be sure, the only way to avoid the latter is to embrace the former.

Factoring your invoices is a sensible way to keep the tax man off your back and to retain ownership of the business that you worked so hard to create.
Factoring your invoices is a sensible way to keep the tax man off your back and to retain ownership of the business that you worked so hard to create.

Not much of a choice.

But taxes have a way of coming due at the most inconvenient time. For some, it’s just after the busiest season of their year. From Thanksgiving to the middle of January, some firms can do 20% or more of their annual business. But, when the season ends, then what? Business often slumps for a couple of months at least.

And that can mean that when the tax bill arrives, you aren’t financially prepared for it.

 

I haven’t met anyone who likes to pay taxes.

Oh sure, you hear of people like Warren Buffett talking about how they ought to pay more tax, and how the government needs to change the law so that they will. But you’ll never catch any of them forgoing a legitimate tax deduction to do it.

And they’ll never donate anything to the federal government, either.

Donate? To pay the national debt? Yes. That’s what I said. It’s right there on your tax return.

You can check a box, and donate your refund to the federal debt.

Fat chance, I hear you say. And I agree with you. I mean, who in their right mind would do so?

 

My point is that apart from the odd billionaire who thinks that the law should be changed so they are forced to pay more, the rest of us, and no doubt that includes you, prefer to pay less. But the thing is that time and taxes wait for no man, and certainly no business.

The failure to pay taxes in the short term can give something as small as your town government the right to put a lien on your business, which can make them the owners, and not you, in the stroke of a pen.

And that means that you have to have an alternative method that you can draw upon quickly, in order to find the money you need to pay it when it does become due.

The risks are just too high to ignore it.

 

Factoring your invoices is a sensible way to keep the tax man off your back and to retain ownership of the business that you worked so hard to create.

It enables you to obtain the money you need sooner than you otherwise would expect to get it.

For example, let’s say that you have issued invoices worth $50K, and that you expect them to be paid in 90 days. You knew that your taxes would be due in a month or so, but you got so busy that the time slipped by before you knew it.

Then your accountant tells you that you have to pay it in 45 days. What do you do?

One option would be to

That would prevent a problem with the government.

Or, let’s say that you had a particularly good year, but you earned more money at the end than at the beginning. And that meant that instead of holding some of what you earned in reserve for your taxes later, you had to use it to keep the company going during those lean months.

But now, because of your unexpectedly high earnings, you have more tax to pay than you were able to prepare for.

One way to deal with that problem is to use factoring to cover the difference. Even with the interest rates at historic lows, you’ll find that the discount at which you sell your invoices will be considerably less than the interest you would pay on a loan.

Not only that, but you’ll avoid taking on any new debt.

And that has to be a bonus for you.

 

The Pros and Cons of Factoring Invoices 2013

By: Chris Lanchech

If your company is in dire need of ready cash for your working capital, one way of securing that money is by factoring invoices that your business has accumulated and has not yet collected on. This is just one way of securing quick cash for the company (other typical ways include securing a business loan or establishing a line of credit), and although it is not as common as other options, many companies have found it compatible with their particular needs and circumstances.

What is Factoring?

If your company offers credit to customers, then the accounts receivable (which in the accounting books of customers are labeled as “accounts payable”) constitute part of the company’s assets. It has not been turned into cash just yet—and this is what a factoring company does in a very short amount of time. Instead of waiting for the customers to pay the balance of their accounts, your company can sell those invoices at a discount. For example, your company can receive $900 right away for an invoice that calls for a $1000 payment. When the customers pay their invoices in full, that payment goes to the factoring company.

Advantages of Factoring

Quick ways of securing cash for companies have their own sets of pros and cons, and factoring invoices is no exception. These are the advantages that your company receives should it decide to factor its invoices to a factoring company:

  • Some businesses may find it difficult to get a small business loan or establish a line of credit. Invoice factoring is much more possible to secure.
  • This practice allows the company to receive the money it needs much more quickly than waiting for the customers to pay the balance of their accounts. Typically, your company should receive the money about two to five business days after your agreement with the factoring company has been finalized. Some companies even receive their money in as fast as 24 hours.
  • The money your company will receive is generally larger than the amount you can get from a business loan.
  • Invoice factoring also saves your company the effort of collecting the accounts receivables, as the work is done by the factoring company.

Disadvantages of Factoring

There’s no such thing as a perfect solution for getting large amounts of cash for a company, and factoring has its downsides as well. This is especially true if you have less than ideal customers. If they are slow to pay or if they have a dubious credit history, this can affect the fee that the factoring company will require.

Your customers must also pass the standards set by the factoring company; if they do not or if the factoring company thinks your customers are unreliable then you may receive a lower percentage of the accounts receivable up front.

But in spite of the drawbacks, factoring your invoices via a factoring company will be beneficial for your business. It will provide you a steady flow of cash that your business needs to operate and grow.

 

Factoring: How to Obtain Cash Without Debt

 By: Chris Lanchech

obtain cash without debt
factoring invoices will help your business obtain cash without debt

I’m sure that you know already that debt can be your worst enemy.

It comes down to this: Are you solvent? Or if you’re not, will you soon be? In other words, is your insolvency temporary? Can you turn things around quickly?

This is an issue that you must consider, the frequency of which will depend on your business and your circumstances. There are no hard and fast rules.

No doubt you have seen, in the past few years, many stories of companies that had been in business for decades, but that had to close down because they were no longer solvent.

It didn’t matter if their order books were full. When the ratio of debt to cash and accounts receivable passed a certain point, the banks closed them down.

There are a number of ratios that you can use to see just how healthy your company is, and your accountant will be the best person to discuss them with, but I just want to mention one of them. It’s called the Acid Test.

To calculate this key ratio, all you need to do is to add together your invoices and the cash you have on hand, and then divide that number by your current liabilities.

In other words compare what you can convert into cash quickly to what you owe in the time it takes you to make that conversion.

The number you get should be at least one. Anything less than that is a warning sign.

Although many creditors expect to be paid when they provide the service, others will give you a grace period of 30, 60 or even 90 days before contacting a collection agency. And if that’s the case, then you may be able to recover in time.

Another approach, however, would be to conduct the acid test for each of those periods. That is at the 30 and 60 day points, as well as the 90 day one.

And it’s here where you could come unstuck.

It may be comparatively easy to pay your own bills within 90 days and as a result, satisfy your creditors; but it’s just as likely that you will have bills to pay in the intervening period.

And when that happens, you can find yourself insolvent for 30 days or more.

Let me give you an example to show you what I mean. I’ll use small numbers to make it easier to follow.

Let’s imagine that you have $1000 cash on hand and that you have $4000 in outstanding invoices. That makes your total liquid assets $5000.

And let’s also say that your invoices are supposed to be paid within 60 days. So theoretically, you will have $5000 in hand in about two months.

What are your expenses during that time? How much do they add up to be? Is it more or less than $5000? What would happen if your largest customer decided to postpone payment for another month? Would you be temporarily insolvent?

It’s in such circumstances that factoring those invoices can be helpful.

When you fail the acid test, you don’t want to a loan. You probably don’t want to tell your bank that you’re temporarily insolvent, and you’d like their help. J

And even if you could get a loan, it would be the last thing you would want because the added debt would increase your liabilities, making the ratio worse; not better.

So by factoring some of your invoices at least, you could prevent the unthinkable from happening to you.

Why Should I Use Factoring?

By: ChrisLanchech

There are a number of benefits that you can obtain by factoring your invoices. I’ve talked about one of them already.

It’s cash flow. It doesn’t matter how successful your business has been, if cash stops coming in, then a time will come when you don’t have any.

Think of it like this. If you have a basin filled with water and you pull the plug, you have to pour in the same amount as is flowing out of the bottom. Otherwise, there will come a time, perhaps sooner than you think, when there won’t be any left.

But instead of water, it could be cash.And it’s something that can take you by surprise, especially when everything else seems to be going as well as it should.

For example, you could be filling orders and shipping them to your customers. Your customers could be delighted with your prompt service.

Or, you’re employees could be the most productive they’ve ever been.

Or your suppliers could be giving you exactly what you need just-in-time.

 

But, if there’s a delay for any reason in the payment of your invoices, you could suddenly find that there’s no cash left in the company to do any of that.

 

How would you feel if that happened to you?

 

Factoring can do more than just keep your firm going. It can also help you to maintain your creditworthiness.

The news today is replete with examples of people who have been thrust from the homes they’ve lived in for 30 years, because when they started missing mortgage payments, the banks foreclosed on them.

 

What does that teach us about how much the banks trust the firms we own to help us when we need it? If nothing else, it demonstrates that when the chips are down, they won’t.

 

Whatever they were willing to do for us in the past, matters not a jot.

 

And so that means that we have to look for other options and have them in place before we need them. Because, as much as we dislike them, banks are still the place where we have to go, in most case, to get loans for capital expenses.

We can’t live with banks, and yet we can’t live without them. If your creditworthiness has been damaged, for any reason that you care to name, your bank simply will not loan you the money that you need when you need it.

If truth be told, they may not anyway. But, your chances are greatly diminished if your credit rating is poor.

And so, rather than waiting until the last little bit of cash is about to drip out of your company, my suggestion is that you make factoring a part of your firm’s strategy.

In today’s economy, you simply don’t know when you might need some extra money, just to tie you over. And you can’t afford to leave something as important as the survival of your business until the last minute.

 

The Necessity of Cash Flow

Banks are notorious for offering you money when you don’t need it, but demanding it back when you do.

If you add to that the growing propensity of customers to pay on the last day of the grace period . . . or later, then you’ll know that even the healthiest businesses can find themselves in dire straits before they know it.

 How did we get into this mess?
To a certain extent, it doesn’t matter.

But for the record, we can still remember when the banks were bailed out. Some thought they were too big to fail. (Pride goes before a fall.)

Others preached ethics, but went for big profits instead.And still others decided that the laws applied to everyone else, though not to them.

But probably the most frustrating thing to come out of the financial debacle is the fact that when the government handed over the billions of dollars required to keep them from going bankrupt, they made no attempt to hold these same companies accountable for the way they spent that money.

And so instead of providing financial support to businesses, they simply paid themselves the bonuses that they couldn’t have afforded beforehand.Whatever the causes were, it’s businesses like yours that have been left to suffer.

I remember someone telling me that he was property rich, but cash poor. And I imagine that you could be in the same situation. You have the plant and equipment, you have people with the skills you need, and you even have a relatively full order book. But, your cash flow could do with some help.

There’s just too much time between when you send out your invoices and when you get paid for them. Cash flow is an indispensable part of any successful business. And shutting it off in a firm can have the same effect as staunching the flow of blood in the body. Neither can survive for very long.

Factoring is one means that you have available to fight back. And I use the term “fight” for a reason. Business is something of a war.

Some will argue certainly it always has been and always will be. But I don’t think that’s the case at all. There is still a lot of collaboration and cooperation going on to this day, and social media may help to make it even more so.

But there is something of a fight involved, especially when it comes to getting the money you need to keep yourself going. The war, however, seems to be against the whims of your bank and economic pressures, rather than that of your customers.

In case you’re unfamiliar with the term, factoring is nothing more than a means through which you can obtain cash quickly via your invoices. It’s not a loan. It’s a sale.

You sell your invoices at a bit of a discount to another company. That company pays you cash for them, and then you’re able to put that money directly into your business.

And by doing so, you can keep your cash flow going.