factoring invoices – NeeBo Capital Blogs

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

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.

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.

Factoring Company Benefits: Stabilizing Business Cash Flow

By: Chris Lanchech

Some businesses refuse to turn to a factoring company because they believe that doing so means they could incur more debts. But this is very far from the truth. There are many reasons why factoring your accounts receivable can be beneficial for you. Simply take the following into consideration:

factoring companies, company factoring — Neebo Capital specializes in the Factoring of invoice receivables for companies who maintain commercial accounts receivables.

Benefit #1: You Will Have a Starting Capital

If your client gave you a huge project, you can expect that the first few months will be quite difficult.

You won’t have any immediate funds to start with. You won’t have cash for orders, employee benefits and incentives, and production expenses. Most of the time, businesses take out a loan just so they can get started with work. But with the help of a factoring company, you’re getting paid for your work quickly. In a way, it’s like the client has already paid you 80% in advance.

Benefit #2: You Get Your Money Fast

Have you ever tried getting a business loan from a bank or a credit union? It could take two months for a loan of $60,000-$100,000. When you turn to invoice discounting the procedure usually takes no more than five days. In just five days you’ll have your invoice purchased and the money deposited to your bank account.

Benefit #3: Credit History is Not a Factor

A new business will not have good credit standing. This is because it has little to no credit history to show. A business starting to fall off the grid will have weak credit scores to provide. In both cases, getting approved for a loan can be tough. However, factoring businesses do not look into credit history. Instead, the company will assess the value of the open invoice and of the client that is going to pay for it. This means that a small or new business that is still thriving or a company already leaning towards debt can still get money up-front to regulate cash-flow and stabilize its finances.

Benefit #4: Having a Wealth of Funds in Preparation for Seasonal Demands

As months go by your business will see a flux in demands. If you put out several or all of your open invoices for account receivable factoring you will have a steady supply of cash right from the start to prepare you for these issues. You never want to be caught off-guard and factoring invoices is a sure-fire means of being prepared, financially.

If you need immediate cash without suffering from the downfalls of a bank loan, approaching a factoring company is a very smart – and in many ways the best – option you can turn to. Check out the various factoring companies online and decide which among them will offer you the best deal.

Factoring Business vs Bank Loans

By: Chris Lanchech

The factoring business has been around for centuries, starting all the way back to the Renaissance era in Europe. To this date it is one of the key essentials that any growing business should utilize if they intend on staying afloat and to eventually expand. So what is invoice factoring and why is it essential for a business’s survival? In order to help you understand and get a firm grasp of how this process can indeed help your business, here is a quick dive at the definition and individual aspects of factoring business

Is It a Loan?

First and foremost, factoring invoices are not a type of loan. A loan is where an individual or business borrows money and then pay it back with interest. In factoring, the company is simply buying your assets; in this case, they purchased the amount listed in your invoice.

For example, a client gave you a project, which takes 6 months to complete and your current invoice indicates that the fee they’ll pay you at the end of the term is roughly $100,000. Unfortunately, since your business is not paid at the onset, you could possibly face financial setbacks until such time the project is completed. To solve this problem, you may approach a factoring company.

How Does It Work?

The factoring company will assess your invoice and this can usually take three to five days until they approve and deposit the amount to your bank account. What happens is that the company will buy your assets (invoices). Usually the company will pay you 80% first and then the remaining 20% when the client pays the full amount.

This means that you have roughly $80,000 right at the very beginning. This is money that you can use for raw materials and funding the project to its completion. By the end of the term you won’t be getting the full $100,000; the factoring company will charge you certain fees (usually no more than 2%) in return.

Collecting the Invoice

Now there are two options. You can either notify your client about the factoring agreement and then when the job is complete they will directly pay the factoring company instead of handing the payment to you. Most companies do not choose this route. Instead, they usually just let the client pay them and then hand the money over to the factoring company. This makes their agreement private and kept only between the two parties involved.

Bank Loans

A factoring company purchases your accounts receivable and will then collect the actual payment from your client later on. A loan, on the other hand, is where you borrow money from a lender with the intention to pay them back, usually with interest. The problem is that a loan can carry high interest rates, high penalties, and the process can take too long. A factoring business is like getting paid cash and it is really necessary in order for a business to be able to fund its daily operational costs.

Should You Choose Factoring Companies Over Banks?

By: Chris Lanchech

Factoring companies purchase accounts receivable from various businesses and will enable you to get immediate cash on-end to serve as resource for your day to day operations. Of course each time they lend you an amount it will depend mostly on the quality of your assets. However there have been accounts of people getting duped by fraudulent factoring companies and there have been factoring institutions cheated by fraudulent borrowers as well. With banks offering business loans and other credit options, why would factoring invoices be a better option?

Reason #1: Bigger Cash Out
The problem with getting financial assistance from a bank is that they normally give you only up to 60% upon payout. Some banks and credit institutions do purchase invoices and assets but they won’t pay you enough to get your cash flow back on track. With a factoring company, however, you can get as much as 75-80% right on day one. That is pretty much the same as saying you got paid for the job right on the same day you started working on it. It becomes even better if you factor multiple invoices at the same time.

Reason #2: Lower Costs
Credit unions and banks can charge a pretty hefty fee. You’ll see charges that can go all the way up from 4% to a whopping 12%. They can literally rob you of your profits. A factoring company will generally charge you less than 2%. This means you get to use your money and they still get to earn a little profit along the way. One of the best things about factoring invoices with dedicated companies is that they sometimes offer factor insurance. This means you won’t have to pay them the money in case your client defaults on his payment. Instead, they’ll give you the rest of the loan and will then chase after your client to get the money back.

Reason #3: Faster Processing
Your business may not be able to function until you get some funds to start with and the problem with banks is that the application and assessment procedures could last for weeks. The good thing about a factoring company is that the entire procedure only takes a few days. Usually it only takes three to five days and you’ll have the amount deposited to you. To make the process even faster, factoring invoices usually only requires you to fill out two pages of information. This is quite the opposite of applying for a business loan or factoring invoices with a credit union because that would require piles of paperwork and information.

The Verdict: Factoring Companies versus Banks and Credit Unions
Banks and credit unions can be an option especially if your business has good standing with them but remember what your company’s main focus is: profit. Profit is derived from steady cash flow and lower overhead costs. You can only attain these by having stable resources, less costs, and less time wasted. With all of these taken into consideration, your company can benefit more if you choose factoring companies instead of banks.

An Introduction to Factoring Invoices

By: Chris Lanchech

Factoring invoices is one of the things any business will need to continue operations and growth despite seeing financial instability caused by slow overturns and residual returns. It can be very difficult for your business to progress while you are still waiting for your clients to pay. Wouldn’t it be great if all your clients could pay you immediately? That might seem impossible but with factoring you can make it happen.

What is Factoring?

Factoring, also referred by some as invoice discounting, works much like a regular loan except in this case you are considering your invoice or accounts receivable as the ledger. The factoring company will consider your invoice and upon reaching an agreement will lend you the amount that you will be paid by your clients. Consider the example below:

An IT company was requested by a marketing company to develop a dynamic website and overall the payment was to be for $150,000. The IT company, needing resources to start with, factors the invoice with a factoring company. They lend the IT Company 80% of the accounts receivable (in this case it will be $120,000). They will only give the remaining 20% when the client pays the IT Company. The $150,000 that the IT company receives will then be paid to the factoring company, less the fees that the company will have to pay, such as interest fees and administration fees.

Is It Beneficial to You?

Every small or growing business requires liquid cash if they desire to move forward. A business cannot rely solely on their own minimal funds while working towards their accounts receivable, lest they fall into stale debt.

First of all, one has to consider the fact that factoring invoices yield more immediate cash. Most factoring companies lend up to 80% up-front. Banks will usually only agree to give you 50-60%. This means that you can get more resources to get cash flow back in order.

Secure Your Business’s Finances

You might be wondering about the likelihood that your client turns bad and does not fulfill the agreement and your invoice is left unpaid. In this case most companies have insurance offer that remedies the problem. They will still give you the full amount of the loan and they will be the ones to chase after the client to get the payment owed.

If you are still starting with your business or if you are in need of steady cash flow to finance your company’s expansion then factoring or invoice discounting may be your best solution yet. The process yields higher immediate cash-payback than what banks offer and you can get approved in 3-5 business days.

Processing fees, interest rates, and miscellaneous fees are much lower than what you’d expect and you can even avail of insurance to protect you in case your client defaults on the payment. Getting your cash flow in a steady rate is crucial for your business’ growth and factoring invoices is a much better, faster, and efficient means of achieving this.

Factoring Invoices Is A Solution To Get Your Business Out Of Trouble

It is okay to admit your business was affected by the ‘great’ recession. If are still in business after taking a hit in the recession you can pat yourself on the back. This blog is about the financial strategy businesses are using called ‘factoring.’

Have you ever considered selling your outstanding invoices? Well if you have then you have thought about factoring. Factoring allows you to establish a monthly credit facility anywhere from $10k to $10 million monthly. This allows you to have a pool of capital you can pull from by selling your invoices as soon as they come in.

Quite a few invoice factoring companies focus on buying outstanding invoices from businesses. You can be sure that you can establish a credit facility offering your business help in a financial crisis. If you want to need cash on had and you have outstanding invoices we recommended you visit Neebo Capital.

Invoice factoring is a great solution to get your business out of cash flow problems.

Remember the fact that the knowledge of the invoice factoring company you select is very important. Financial specialists even advise business owners to avoid working with inexperienced factoring companies. Because inexperienced factoring companies do not have experience in working with business owners.

For example: maybe there is a regulation in your industry that a younger/inexperieced factoring company might not be aware of, and this mistake can cost you big money in the long run. Trust me we have seen it. We get prospects from time to time come to us looking to leave their current factoring relationship.

It is recommended to sell your outstanding invoices or your accounts receivable to an experienced invoice factoring company.

Factoring Is Faster Than Small Business Loans

Well for starters, if you have ever received a small business loan then you know small business loans require a l Factoring Is Faster ot of paper work. Small business loans also require you to submit paperwork out the wazooo…

This is why many business owners are turning to factoring invoices as a stronger solution. Simply put there is not as much red tape, and the contracts for lending can be as short as 30 days.

Factoring Invoices has always been a financial method to raise capital. Cash on hand allows businesses to expand, market, put on new employees, take advantage of supplier discounts, or just manage overhead better.

Additionally, credit is becoming more difficult to get for small businesses without years of financials or vendor references. Therefore factoring is a way to quickly raise cash for working capital needs.

As mentioned above, getting a bank loan can be difficult and take months. As opposed to factoring in which you can have funds within 2-3 days.

Approval for bank loans for small businesses is difficult to come by, as loan requirements get stiffer and stiffer in the post- credit crisis world. Bank loans also require application fees, lengthy application procedures, and lots of paperwork and preparation. And don’t forget the interest on a bank loan.

DEBT

That’s right, a large benefit of factoring vs. a bank loan is that with factoring you do not add debt to your company. Factoring established a credit line against your incoming sales. A bank line establishes a credit line against you, your business and its assets.

Invoice factoring gets your business cash fast, without the paperwork and debt, this is why it is a growing finical tool for small business.

Credit Insurance Policies on Receivables

So you have a business and you sell to clients on credit terms. Maybe you should consider credit insurance policies on your receivables. Why?

The simple answer is to reduce risk, and strengthen your businesses financially in order to establish a stronger bankline in the future.

However the deeper answer has to do with your business and its potential loss. The saddest stories in the factoring world come from businesses who lose their largest accounts overnight.

These accounts can be large fortune 500 companies with sound financials.However one bad press release or shock to the economy can have a trickle effect and bring their business to a halt. A perfect example of one of these unforeseen chain reactions, was the filing of bankruptcy of one of the largest food processing companies in the industry.

All it took was one massive press release about the “pink slime” found in processed hamburger meat and The King of Prussia, a PA-based food processor was devastated. Prior to the release the company processed about 500 million pounds of beef annually!

Now imagine if you are a suppler for this company with over $50,000 or $100,000+ in outstanding A/R. Prior to the pink slime press release you may have not been worried. The King of Prussia may have been one of your largest and secure accounts. However you now can see how quickly things can change in today business environment.

why should you buy credit insurance?

Had suppliers had credit insurance policies for their large customer “the king of Prussia” they would have recovered $0.80 to $0.90 cents for every dollar they were owed.

Sometimes – and this is the reason for credit insurance – there are unforeseen factors that influence the performance and survival of your customers. Whether those are the court of public opinion, mismanagement, or a bad acquisition, companies go bankrupt, leaving you and your company paddling up shits creek.

Visit Neebo Capital for Credit Insurance Policies on Receivables