Is Invoice Factoring Right for your Business?

Consumer CollectionsToday’s business climate is like no other in recent history. Business owners are faced with new and complex challenges. Our economy faces high unemployment and stagnant wages. Consumers who account for 70% of GDP are tightening their belts and spending less. Product sales are harder to get and by the same token, the buyer is also conserving cash and is often slow to pay.

Cash flow is paramount. There are two ways to secure a steady flow of capital: One is through bank financing or lines of credit. In today’s economy however, obtaining a bank’s credit line may be next to impossible. Small businesses are virtually ignored as collateral is required and often banks need personal guarantees. In addition, a bank loan is a debit on company books.

The second way to manage cash flow is to factor your invoices or accounts receivables. A factoring company buys, manages and collects payments due on your receivables. The business owner decides on the amount of cash needed and then creates a “Schedule of Accounts.” It is a list of receivables that he/she wants to factor. The factoring company then reviews the list and will request a payment history from the owner. Based upon the timeliness of payments, the factor will advance cash to the owner. This can vary from 70% to 90% of the total receivables. The factor will also charge a monthly fee based on outstanding receivables, usually about 3% per month. With today’s technology, all of these transactions are done electronically usually via email and bank wire transfers.

Factoring receivables has several advantages. First off, it is simple and easy to manage. Unlike bank lines of credit that may take months to obtain, factoring is quick and easy. Usually at sign up, the owner furnishes the factor with ID, Articles of Incorporation or DBA, a master list of receivables and a sample of invoices with necessary documentation. He then signs an agreement that allows the factor to contact customers and collect payments. The business owner would then notify customers that they should make payments to the factor at their address.

The owner is now free of the hassle of writing follow up notices and making phone calls to collect payments. He/she can free up employee time and redirect it to sales and new business.

The business owner now has the cash to expand and seek out bigger accounts. Without factoring, some sales are lost because the owner cannot buy the raw materials needed to make the product in time to get the sale.

Some service businesses that generate a steady cash flow may not need a factoring company. The decision on whether or not to factor your receivables depends on the degree to which you want to smooth out your cash flow. Each business owner must analyze his/her needs and decide if factoring will enhance the overall effectiveness of the company.

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