With the economic downturn and resulting credit crunch of the past few years

It’s Time to Take a Fresh Look at  Invoice Factoring

 

 

There are many misperceptions  amongst CFOs and finance executives when it  concerns asset-based lending. The biggest is that asset-based lending is a financing  choice of  last hope – one that only "desperate" companies that can’t  get a traditional bank loan or line of credit would  think of.

 

With the economic downturn and resulting credit crunch of the past few years, though, many companies that might have  gotten more traditional  kinds of bank financing  before have  now  counted on asset-based lending. And to their surprise, many have  discovered asset-based lending to be a  versatile and cost-effective financing tool.

 

What Asset-Based Lending Looks Like

 

A  common asset-based lending  situation often looks something  similar to this: A business has survived the recession and financial crisis by aggressively managing receivables and inventory and  postponing replacement  capital spending.  Since the economy is in recovery (albeit a weak one), it  has to rebuild working capital  to fund new receivables and inventory and fill new orders.

 

 The sad thing is, the business no longer qualifies for traditional bank loans or lines of credit due to high leverage, deteriorating collateral and/or  extreme losses. From the bank’s perspective, the business is no longer creditworthy.

 

Even businesses with strong bank relationships can run afoul of loan covenants if they suffer short-term losses,  in some cases  compelling banks to  rescind on credit lines or decline credit line increases. A couple of bad quarters doesn’t necessarily  signify that a business  finds themselves in  difficulty, but  frequently bankers’ hands are tied and they’re  required to make financing  moves
they might not have a few years ago, before the credit crunch  altered the rules.

In  circumstances like this, asset-based lending can  supply much-needed  money to  enable businesses  withstand the storm. Companies with  good accounts receivable and a  sound base of creditworthy customers tend to be  the most ideal candidates for  accounts receivable financing  advances.

 

With  standard bank loans, the banker is  predominantly  interested in the borrower’s  predicted cash flow, which will provide the funds to repay the loan.  Thus, bankers pay especially close attention to the borrower’s balance sheet and income statement  to  evaluate future cash flow. Asset-based lenders,  however, are  mainly  worried about the performance of the assets being pledged
as collateral, be they machinery, inventory or accounts receivable.

 

 Therefore  prior to lending, asset-based lenders will  normally have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they  commonly require regular reports on inventory levels, along with liquidation valuations of the raw and finished inventory. And for loans backed by accounts receivable, they  normally perform detailed analyses of the eligibility of the collateral
based on past due, concentrations and quality of the debtor base. But  as opposed to banks, they usually do not place tenuous financial covenants on loans (e.g., a maximum debt-to-EBITDA ratio).

 

Asset-Based Lending: The Nuts and Bolts

 

Asset-based lending is  effectively an umbrella term that  includes several different  styles of loans that are secured by the assets of the borrower. The two  main types of asset-based loans are factoring and accounts receivable (A/R) financing.

 

Factoring is the outright purchase of a business’ outstanding accounts receivable by a commercial finance company (or factor).  Commonly, the factor will advance the business between 70 and 90 percent of the value of the receivable  at the moment of purchase; the balance, less the factoring fee, is released when the invoice is collected. The  invoice discounting fee typically ranges from 1.5-3 .0 percent,  depending
upon such factors as the collection risk and how many days the funds are in use.

 

Under a  contract, the business can usually  pick which invoices to sell to the  invoice factoring company. Once it purchases an invoice, the factor  handles the receivable until it is paid. The  factoring company will  practically become the business’ defacto credit manager and
A/R department, " conducting credit checks,  assessing credit reports, and mailing and documenting invoices and payments.".

 

A/R financing, meanwhile, is more like a  standard bank loan,  yet with some  chief differences.  Although bank loans may be secured by different kinds of collateral including equipment, real estate and/or the personal assets of the business owner, A/R financing is backed strictly by a pledge of the business’ outstanding accounts receivable.

 

Under an A/R financing arrangement, a borrowing base is  created at each draw, against which the business can borrow. A collateral management fee is charged against the outstanding amount, and when funds are advanced, interest is assessed only on the amount of money actually borrowed.

An invoice  generally must be less than 90 days old  so as to count toward the borrowing base. There are  frequently other eligibility covenants  like cross-aged, concentration limits on any one customer, and government or international customers, depending on the lender. In some cases, the underlying business (i.e., the end customer) must be deemed creditworthy by the finance company if this customer makes up
a majority of the collateral

 

 

Five Great Factors A Company Must Use Factoring Companies

One of the most obvious benefits of using a factoring company is the ability for a business to quickly raise money when a traditional loan is unattainable, or when the company is experiencing rapid development and needs acquire products, pay vendors and cover business expenses.

Nonetheless, this is not the only advantage. There are a considerable number of reasons why business should consider factoring invoices.

1. Using a factoring company is an very fast way for business to raise money:
A factoring company offer can be performed in just a just a few days. A business can have money in a really short amount of time. This can be incredibly helpful for a company that is desperate for cash or that is planning to quickly expand their operations.

It can take a considerable amount of time making an application for a loan and then hearing back from them on whether or not they are want to supply a business with the money needed. A company could not have that quantity of time. The income of their business might depend on getting cash fast.

2. Factoring shortens the collections procedure: Businesses in some cases have to wait weeks and even months prior to they are paid for services rendered. Throughout this time, they may be cash inadequate and could not have the funds readily available to grow their businesses or even pay for present business costs.

3. Using a factoring company allows companies to generate cash without handling new financial obligations: Financial obligations can be an reliable device to build and sustain a company. However, it can also be dangerous, particularly for new businesses. Using a factoring company allows companies to receive badly required capital without depending on an costly loan.

4. Using invoice factoring companies can be a excellent option for companies having difficulties getting a bank loan: Getting a business loan has constantly been challenging. Today, it is even harder due to the fact that banks are holding on tighter than ever to their cash.

If a company has not been around extremely long or has actually had issues repaying loans in the past, the chance they will be able to get a bank loan is very small. In this case, a great alternative would be for a business to make use of invoice factoring services.

5. Factoring can help business that have no collection division or an understaffed one: For small businesses that don’t have a collection division or appropriate workers, a factoring company can provide a much needed service. Factoring can supply them with exactly what they require for money to make it through and/or broaden by advancing money for their invoices and then collecting them. The seller will clearly have to pay for these services, but it is well worth it for numerous businesses.

Factoring Invoices: An Excellent Funding Option for Small Companies.

Medium-Size companies, especially those who have not been in existence for very long, will typically find it hard to secure a loan. Banks are commonly hesitant to lend cash to companies that do not have a great deal of earnings and properties. They also desire proof of the viability of a company and hence require that the majority of operations, particularly small ones, been around for a particular amount of time before they want to turn over any cash. Because of this, a small business| typically has a couple of cash producing alternatives when requires occur. One choice offered, however commonly neglected, is invoice factoring. This is an exceptional method for a medium-size company to obtain cash.

Factoring invoices is helpful for several factors. It permits a company to raise cash without getting new financial obligation. While debt is occasionally needed, the majority of businesses would like to raise cash without obtaining cash. Debt is high-risk, and when it can not be paid back, possessions can be repossessed. If the debt is large enough, it might even require a business out of company.

Receivable Financing doesn’t pose these very same problems. The money paid to the company selling their invoices is protected by those invoices. The work frequently times| many times| oftentimes} has actually already been done and {the company is just waiting to receive payment.

Factoring invoices is likewise a really great alternative due to the fact that it is a method for a medium-size company| to obtain money really quick. More typically than not , when a company is in a money crunch, they do not have much time to figure things out. Their staff members have to be compensated, there are materials to purchase and rent to be paid. These things typically can’t wait, at least not for a extremely long time. For that reason, the time factor is essential. A small business| small will need secure funds as quickly as possible. Factoring enables them to do that. The business’s first experience with a factoring company may require they wait 4-7 days to be paid. However, from then on it is most likely they will receive cash in as little as 24 hours.

After all of the information have been arranged, the factoring procedure is rather easy. A business will offer their invoices to a factor up to 95 % of their value. For instance, a $100,000 invoice could get $90,000. This cash can be utilized for whatever the company desires to utilize them for. After they have received cash for the invoices, the factoring company will collect on the invoices. The original terms of the invoices are in effect. After they have actually been paid on them, the money| is returned to the business they acquired them from, minus the factor’s fee. It’s as basic as that.

Are Financing Receivables and Factoring the same?

Factoring and  Funding Accounts Receivables Are the Same!

The  meanings of the  2 terms “financing receivables accounts receivables” and “factoring accounts receivables” are  almost one in the  exact same. The words ” funding” and “factoring” are interchangeable when it  concerns  mentioning the process by which a business  offers its invoices to a Invoice Factoring company for cash.

The following is a description of Invoice  Funding: “A   kind of asset-financing arrangement in which a  business uses its receivables– which is  cash owed by  clients– as  security in a financing  arrangement. A  business  gets an amount that is equal to a  minimized value of the receivables pledged. The age of the receivables has a large  impact on the amount a  business will  get. The older the receivables, the less the  business can  anticipate. Also referred to as “factoring”.

Invoice  funding, or Receivable Factoring, is a method  where  companies of any size and within any  market can sell their  invoices invoices to   business for  money. There is a  usual  false impression that Factoring is only  utilized by struggling or unsuccessful  companies as a  last hope  prior to they go out of business or  consider bankruptcy. This  might not be farther from the truth.  The majority of businesses  make use of Invoice Factoring in order to  support their  money flow.  Simply put, they use Receivable Factoring to  quicken the  popular three month payment  duration that is  normal of many  consumers, who  typically do not pay their  overdue invoices  instantly.  Companies  varying from  big Fortune 500 companies to small start-ups have been known to  make use of  as a  way of  balancing out cash flow  situations.

The most  usual myth  related to Factoring is that it is only used by failing  companies. However, failing  companies  typically do not have a huge number of current  late invoices. Factoring companies are in business of  buying these invoices– – not lending  cash to failing  business.  In  truth,  a lot of businesses that  offer their invoices to Receivable Factoring  businesses  go ahead and use the  money they receive to  assist in additional sales– which results in more invoices that can be factored down the  way.

In addition to the  concept that only  having a hard time  businesses  take benefit of invoice  funding, there are  a number of other  usual myths associated  this service. Examples are as follows:.

 MISCONCEPTION: A Business’s  Consumers will  End up being Upset When They Realize Their Invoices Have Been Sold to a Third  Celebration (e.g. a Invoice Factoring  business)– Due to the fact that Invoice Factoring  has actually become such a popular  methods of raising  fast cash for businesses,  a lot of  clients are neither  stunned nor  concerned when their invoices are sold. In today’s  financial world,  a lot of customers understand that businesses of all types and sizes  make use of Invoice Factoring as a  method of expanding and growing and not as a last-ditch effort to survive. Because  lots of successful  companies  make use of Invoice Factoring as a  favored  technique of  handling their  money flow it is widely accepted and even  backed by  experienced  consumers.

When invoices are sold to Factoring  business, the  companies  send out a letter, called a “Notice of Assignment” to  all the business’s  consumers alerting them of the sale/transfer of their invoices.  Usually, the letter will explain to the customers why their invoices were  offered and will enumerate the benefits of the sale (e.g. to support  business’s rapid  development). In  a lot of  situations, the only  distinction the  consumers will see is the address where they are  advised to remit their payments. In essence, the factoring  business  guarantees customers and  responses any  concerns or concerns they  might have.  Nevertheless, in some  circumstances,  companies prefer to deliver this information to their  clients themselves– – and this is certainly something that Receivable Factoring companies will  recognize.

MYTH: Receivable Factoring Companies are Like Collections Agencies and Will Harass Customers Who are Late in Paying their Invoices– It  is essential to establish that   business are NOT  collectors.  However  since they are the owners of the invoices they  acquired from a  company, it is their  top  objective to  gather every invoice that is  overdue.  Nevertheless, they do not  run in the same fashion as  standard  collectors, which are  well-known for aggressive and distressing practices .

Factoring  business do  advise customers of  unsettled or late invoices,  however they do so in a professional and  polite way. Invoices that  continue to be unpaid for an  prolonged period are  handled on an  specific basis, which usually  includes collaboration between theReceivable Factoring  business,  business, and the customers.

MYTH:  Making use of a Invoice Factoring Company Costs a Lot of  Cash and it’s Not  Beneficial–Receivable Factoring is a  one-of-a-kind business arrangement that is not the same a  company taking out a bank loan. It does not  include  obtaining money at high  rate of interest. Receivable Factoring invoices is  planned to  assist businesses make  even more  cash. By  getting cash  rapidly for selling their invoices, a  company has  chances to  utilize the available  money Is Invoice Factoring an  costly  procedure? to grow and thus to  prosper. Therefore, the cost of factoring invoices  ends up being  virtually moot  since Invoice Factoring is  just being  device to launch a business forward. Another reason  Factoring makes sense and is a  beneficial  cost is that it alleviates the need for a  company to  utilize an  whole staff for the sole  function to accounts receivable.The  cost savings on  incomes alone  might make up for the entire cost of Receivable Factoring.  With Factoring, the  company  typically pays a nominal  portion of the  overall invoices being sold to the Receivable Factoring company–  however this is  normally equal to a  extremely small cut.

MYTH:  Companies Only Understand How Certain/Common  Kind of  Companies Function– The  idea of invoice factoring  has actually been in existence for many  years.  Since it has  ended up being one of the most  typically and  commonly accepted  techniques for a  company to  rapidly raise cash, invoice factoring companies have  broadened to  deal with  companies associated with about  practically every industry.

Invoice Factoring companies are  know that every business is unique, and they work to  totally  comprehend each and every  company with which they work. Businesses  ought to not  always  prevent invoice factoring  just  due to the fact that they think they are unique or  have actually  apparently  complex operation practices.

 A lot of invoice factoring companies  have actually  taken care of  exceptionally  complicated  scenarios and are experienced in  managing even the most unusual  circumstances. Ultimately, a  company  included in any  sort of product or service or  industry that  expenses  clients  utilizing invoices is a candidates for Factoring.
   
 

 

 

It’s Time to Have a New Look at Invoice Factoring

There are a lot of misperceptions among CFOs and finance executives when it concerns asset-based lending. The most significant is that asset-based lending is a financing option of last hope – one that only ” hopeless” companies that can’t qualify for a traditional bank loan or line of credit would think about.

With the economic recession and resulting credit crunch of the past few years, though, many companies that might have qualified for more traditional sorts of bank financing previously have now relied on asset-based lending. And to their wonder, many have found asset-based lending to be a versatile and cost-effective financing tool.

What Asset-Based Lending Looks Like

A conventional asset-based lending situation often looks something like this: A business has stayed alive the recession and financial crisis by aggressively managing receivables and inventory and postponing replacement capital spending. Now that the economy is in recovery (albeit a weak one), it needs to rebuild working capital in order to fund new receivables and inventory and fill new orders.

Unfortunately, the business no longer qualifies for traditional bank loans or lines of credit due to high leverage, weakening collateral and/or excessive losses. From the bank’s point of view, the business is no longer creditworthy.

Even businesses with solid bank relationships can run afoul of loan covenants if they suffer short-term losses, often compelling banks to end on credit lines or drop credit line increases. A couple of bad quarters doesn’t necessarily suggest that a business finds themselves in difficulty, but frequently bankers’ hands are tied and they’re required to make financing moves they might not have a few years ago, before the credit crunch switched the rules.
In predicaments like this, asset-based lending can deliver the needed money to really help businesses weather the storm. Companies with solid accounts receivable and a strong base of creditworthy customers often tend to be the most suitable candidates for asset-based advances.

With conventional bank loans, the banker is largely worried about the borrower’s forecasted cash flow, which will supply the funds to repay the loan. As a result, bankers pay particularly close attention to the borrower’s balance sheet and income statement in order to determine future cash flow. Asset-based lenders, alternatively, are predominantly concerned with the performance of the assets being pledged as collateral, be they machinery, inventory or accounts receivable.

Therefore prior to lending, asset-based lenders will normally have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they typically demand regular reports on inventory levels, together with liquidation valuations of the raw and finished inventory. And for loans supported by accounts receivable, they typically perform in-depth analyses of the eligibility of the collateral based on past due, concentrations and quality of the debtor base. But not like banks, they normally do not place tenuous financial covenants on loans (e.g., a maximum debt-to-EBITDA ratio).

Asset-Based Lending: The Nuts and Bolts

Asset-based lending is in fact an umbrella term that encompasses several different types of loans that are secured by the assets of the borrower. The two primary types of asset-based loans are factoring and accounts receivable (A/R) financing.

Invoice Factoring is the outright purchase of a business’ outstanding accounts receivable by a commercial finance company (or factor). Generally, these factoring companies will advance the business between 70 and 90 percent of the value of the receivable at the moment of purchase; the balance, less the factoring fee, is released when the invoice is collected. The factoring fee typically ranges from 1.5-3 .0 percent, depending on such things as the collection risk and how many days the funds are in use.

Under a contract, the business can usually decide on which invoices to sell to the factor. The moment it purchases an invoice, the factoring company handles the receivable until it is paid. The factoring company will essentially become the business’ defacto credit manager and A/R department, “performing credit checks, assessing credit reports, and mailing and documenting invoices and payments.”.

A/R financing, meanwhile, is similar to a traditional bank loan, with some key differences. Although bank loans may be secured by various kinds of collateral including equipment, real estate and/or the personal assets of the business owner, A/R financing is backed purely by a pledge of the business’ outstanding accounts receivable.

Under an A/R financing arrangement, a borrowing base is set up at each draw, against which the business can borrow. A collateral management fee is charged against the outstanding amount, and when funds are advanced, interest is assessed only on the amount of money actually borrowed.
An invoice usually must be under 90 days old in order to count toward the borrowing base. There are frequently other eligibility covenants for example, cross-aged, concentration limits on any one customer, and government or international customers, depending upon the lender. In some cases, the underlying business (i.e., the end customer) must be regarded creditworthy by the finance company if this customer

Business Funding: Effective ways to Do It On your own

Unlike what most small business owners think, financing a business is not rocket science.  Really, there are only three  major ways  to perform it: via debt, equity or what I call “do it yourself”  funding.

Each and every  approach  has benefits and drawbacks you should  take note of. At various stages in your business’s life cycle, one or more of these methods may be appropriate.  For that reason, a thorough  awareness of each  procedure is important if you think you may ever  want to secure financing for your business.

Debt and Equity: Pros and Cons

Debt and equity are what  lot of people think of when you ask them about business financing. Traditional debt financing is usually provided by banks, which loan money that must be repaid with interest within a certain  amount of time. These loans  normally must be secured by collateral  in the event that they can not be repaid.

The cost of debt is  reasonably low, especially in today’s low-interest-rate  atmosphere. However, business loans have become harder to come by in the current tight credit environment.

Equity financing is  offered by investors who receive shares of ownership in the company,  as opposed to interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors.  Though equity financing does not have to be repaid like a bank loan does, the cost  over time  might be much higher than debt.
This is because each share of ownership you divest to an investor is an ownership share out of your pocket that has an unknown future value. Equity investors often place terms and conditions on financing that can  hog-tie owners, and they expect a very high rate of return on the companies they invest in.
DIY Financing

My  preferred kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by using a financing technique called factoring. With  invoice discounting  products, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a ” factoring company”) at a discount. There are two key benefits of factoring:.

Significantly  increased cash flow Instead of waiting to  get payment, the business gets  the majority of the accounts receivable when the invoice is  produced. This  decrease in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.

Say goodbye credit analysis, risk or collections The finance company  carries out credit checks on customers and  scrutinizes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also  conducts all the services of a full-fledged accounts receivable (A/R) department, including folding, stuffing, mailing and documenting invoices and payments in an accounting system.
Invoice discounting is not as  widely known as debt and equity, but it’s often more  practical as a business financing  instrument. One  main reason many owners don’t consider factoring first is because it  takes a while and  energy to make  invoice factoring work.  Lot of people today are  seeking out  quick answers and immediate results, but  stopgaps are not always  accessible or advisable.
Making It Work.

For  invoice discounting to  function, the business must  achieve one  extremely important  detail:  provide a  top-notch product or service to a creditworthy customer.  Undoubtedly, this is something the business was created to do  initially, but it  works as a built-in incentive so the business owner does not forget what he or she should be doing anyway.

Once the customer is satisfied, the business will be paid  promptly by the  factoring company it doesn’t have to wait 30, 60 or 90 days or longer to receive payment. The business can then promptly pay its suppliers and reinvest the profits back into the company. It can  make use of these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will  typically more than offset the fees paid to the  invoice factoring company.

With factoring companies, a business can  increase its sales,  develop strong supplier relationships and  enhance its financial statements. And by  trusting in the  factoring company’s A/R management  programs, the business owner can  concentrate on  increasing sales and  raising profitability. All of this can  happen without increasing debt or diluting equity.
The average business  uses factoring companies for about 18 months, which is  the period of time it usually takes to  accomplish growth objectives, pay off past-due amounts and  boost the balance sheet. Then the business will likely be in a better position to  investigate debt and equity opportunities if it still needs to.

Factoring Companies-How They Can Help Your Business Grow