FACTORING SOLVES CASH FLOW PROBLEMS
Cash flow is one of the main reasons businesses fail.
At one time or another, every business, even successful
ones, have experienced poor cash flow. Cash flow does
not have to be a problem any more. A solution is
available.
The solution is called factoring. According to Terry
Smith, president of Terry Smith & Associates,
factoring is the process of selling accounts receivable
to an investor rather than waiting to collect the money
from the customer.
Smith says the concept has been around for thousands
of years. He describes factors as investors who pay cash
for the right to receive the future payments on your
invoices.
"A receivable or an invoice which has not been
paid yet has value. It is a debt your customer has
agreed to pay in the near future."
Factoring can offer many benefits to cash hungry
companies. Instead of having to wait 30, 60, 90 days or
longer for payment on a product or service that has
already been delivered, a business can factor (sell) its
receivables for cash at a small discount off the fact
amount of the invoice. Payroll, marketing efforts, and
working capital are just a few of the business needs
that can be met with this instant cash.
"There have been cases where I have seen
factoring provide the means for a manufacturer to
replenish inventory and make more products to sell
without having to wait for earlier sales to be
paid," said Smith. "Factoring isn’t just a
cash management tool for manufacturers. Almost any type
of business can benefit from factoring."
Generally, a business that extends credit will have
10% to 20% of its annual sales tied up in accounts
receivable at any given time. "Think for a moment
how much money is tied up in 60 days worth of
invoices," said Smith. "you can’t pay the
power bill or this week’s payroll with a customer’s
invoice, but you can sell that invoice for the cash to
meet those obligations."
Smith says factoring is a fact and easy process. The
factor buys the invoice at a discount, usually a few
percentage points less than the face value of the
invoice.
"People consider the discount a small cost of
doing business," said Smith. : A four percent
discount for a 30 day invoice is common. Compared with
the problem of not having cash when you need it to
operate, the four percent discount is negligible. Just
the factor’s discount as though your business had
offered the customer a discount for paying cash. It
works out the same."
"I know of other companies that consider the
discount the same way they treat a sales price,"
said Smith. "It’s just the cost of generating
cash flow, much like discounting merchandise is the cost
of generating sales."
Smith emphasizes that factoring is a cash flow tool
used by a variety of businesses, not just those who are
small or struggling. "Many companies factor to
reduce the overhead of their own accounting department.
Others use factoring to generate cash which can be used
to expand marketing efforts and increase
production."
Factoring is especially appealing to young and
rapidly growing companies. Since the process shortens
their business cycle, these businesses can grow faster.
The ability to make more products to sell while waiting
for invoices to be paid is largely eliminated. Such
businesses usually net much more profit with factoring
than without, even when the discount is considered.
So, why wouldn’t a business just go over to their
friendly banker for a loan to help them through their
cash flow problems? Smith explains, "Getting a loan
can be difficult if not impossible, especially for
young, high-growth operation, because bankers are not
expected to decrease lending restrictions soon. The
relationships between businesses and their bankers are
not as strong or as dependable as they used to be."
Smith continues, "The impact of a loan is much
different than that of the factoring process on a
business," he said. " A loan places a debt on
your business balance sheet, costing you interest. By
contrast, factoring puts money in the bank without
creating any obligation and frequently the factoring
discount will be less than the current loan interest
rate. Loans are largely dependent on the borrower’s
financial soundness, whereas factoring is more
interested in the soundness of the client’s customers
and not the client’s business itself. This is a real
plus for new businesses without established track
records."
There are many situations where factoring can help
business meet its cash flow needs. By providing a
continuing source of operating capital without incurring
debt, factoring can provide growth opportunities that
can dramatically increase the bottom line. Virtually any
business can benefit from factoring as part of its
overall operating philosophy.
|
