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Credit InformationFactoring Financing: How to grow your business without fiscal obligation or loans
by:
Marco Terry
What is factoring?
Accounts due financing, besides acknowledged as factoring, is a powerful fiscal tool that has fueled the growth and success of a number of companies.
Factoring enables companies to capitalize on their unpaid assets
by merchandising them to a factorization institution for immediate payment. With factoring, companies
immediately get paid for their invoiced activity from the factorization finance company, piece the factorization institution waits to be paid by the customers. Factorization
strengthens a business' cash position by shortening the time to get invoices paid to 48 hours and providing the needful funds to meet current expenses and
target new opportunities.
Factoring Benefits
As opposed to loans and lines of credit that require that the client have tangible assets and strong financials, factorization relies much heavily on the
financial strength of the clients' customer. This is a critical feature,since galore new and small businesses do not meet the fiscal criteria of traditional
lending institutions. However, galore small businesses have a roll of financially strong customers that can be leveraged. Factorization empowers businesses to
capitalize on their client list, and provides them with a tool to transform outstanding assets
into immediate cash, without generating debt. Since
Factoring is not a loan, it is an ideal fiscal product for the following:
o New and emerging businesses including small and house businesses, consultants and solo-preneurs.
o Businesses with financially strong customers
o Businesses that are preparing to grow importantly
o Business with intangible assets (e.g. consultants)
o Businesses that do not want to take a loan
An additional benefit of factorization is that the factor normally assumes part of the clients' credit risk for the customer. This means that if the client
becomes financially insolvent due to bankruptcy and makes not pay the invoice, the factor wish assume the loss. This is a critical service for small companies
who may not be able to afford the bankruptcy of a customer.
Costs
The price of a factorization dealing - besides acknowledged as the discount - vary based on a number of variables such as the fiscal strength of the client and
the figure being factored. Generally, the discount is a percentage of the invoice's face value that increases with time until the invoice gets paid. Small
businesses, those that have between $20,000 and $300,000 in yearly revenues, can expect to pay a discount rate of just about 2% for every ten (10) days that the
invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.
Factoring at Work: Business Services and Products, Inc. Case Study
Business Services and Products, Inc. (BSP, Inc.) is a small fictional company, which provides business consulting and instrumentality to local companies. It has
$300,000 of annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Though most business owners would-be be really happy to
manage such a company, Jane Sullivan, BSP Inc's president, is really disquieted just about her company's fiscal position.
Most of BSP Inc.'s customers are large companies with a nice reputation for always paying their invoices. However they always take between 30 to 45 days to
pay them. BSP Inc., however, inevitably to pay their employees every two weeks and their vendors every four weeks. This discrepancy between the time that
customers pay their bills and the time BSP Inc. inevitably to pay their employees and vendors has created cash flow problems in the past. Furthermore, these cash
flow problems have already caused Jane to delay payroll doubly this year and have placed her trade (vendor) credit in hazard multiple times. This has besides
caused her to pass on a number of significant business opportunities because she was unsure of the company's fiscal ability to hire and pay for additional
staffers. Unfortunately, BSP Inc. did not have a large enough fiscal cushion in the bank to afford paying employees piece waiting for 45 days new clients
to pay their invoices.
The following table provides an summary
of BSP, Inc's current fiscal position.
Business Services and Products, Inc (without financing)
Yearly sales: $300,000
Lost new sales opportunities: Unknown
Total Sales: $300,000
Variable Price (60% of Sales): $180,000
Fixed Price (Rent, phones, etc): $20,000
Total Costs: $200,000
Profit (Sales - Costs): $100,000
Although the company's prospects appear great, Jane may have to stall her company's growth until she builds a large enough cash cushion at the bank to
finance her company's growth. After careful consideration, Jane distinct that a factorization line of working capital could help strengthen her company's
financial position. Furthermore, factorization her invoices would-be change BSP Inc. to take on new customers and continue growing, knowing that she could
capitalize on her slow paying customers. BSP Inc.'s funding agreement wish provide the institution with an advance of 70% of her invoiced services. This means
that the institution can get 70% of the face value of the factored invoices inside
24 to 48 hours of submitting them to the factor. The remaining 30% of the
funds, less the factorization fees, wish be quickly rebated as shortly as the client pays their invoice.This line of working capital reinforced the company's
financial position and bank account, facultative Jane to pay for new employees to service new contracts. Jane besides distinct to use the extra capital to pay her
vendors early, obtaining quick payment discounts and portion to reduce the cost of factoring.
BSP Inc. customers pay their invoices inside
30 days of receipt. The discount (factoring fee) for these invoices is 6%. Every time an invoice is paid, the
factor rebates BSP Inc. the remaining 30% that was not advanced less the factorization fee. This means that once the dealing is completed, the factor rebates
24% (30% - 6%) to BSP Inc. Thanks to the factorization line of working capital, Jane was besides to secure an additional $120,000 worth of business, delivery her
annual revenues to $420,000.
The following table shows BSP Inc.'s fiscal position a year after exploitation factoring.
Business Services and Products (with factoring)
Existing Sales: $300,000
New Sales: $120,000 (factored)
Total Sales: $420,000
Variable Price (60% of Sales): $252,000
Fixed Price (Rent, phones, etc.): $20,000
Cost of Factorization (6% of $120,000): $7,200
Total Costs: $279,200
Net Profit (Sales - Costs): $140,800
As can be seen from the above table, factorization helped BSP Inc. increase profits well from $100,000 to $140,800 - a 40% increase. It placed BSP Inc.
on a much stable fiscal footing, priming it for growth. Furthermore, the cost impact of factorization on the bottom line was minimal, as it was easily
absorbed by the additional business, showing that factorization was paid for directly by the growth.
Just just about the author:
Just just about Commercial Capital, LLC and Marco Terry
Commercial Capital, LLC is a leading commercial finance institution that specializes in providing working capital through factorization to small businesses. For much information or a free consultation, please visit our web sites at http://www.ccapital.net or http://factoring.qlfs.com or call us at (786) 206 4722.
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