Small Business Funding Alternatives

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Modern-Day Factoring – How it Works

The Vendor submits a particular customer for pre-approval of the factoring of their invoices. 

 Once pre-approved: 

• The Vendor performs a service or delivers a product and has issued the invoice to its client (account debtor) which has signed off on the invoice.

•  A copy of the invoice is faxed to factoring company and the original is overnighted so that the factoring company can begin working right away.

• Upon receipt of the signed original, the factoring company will wire transfer 70 to 80% of the face amount of the invoice into the Vendor’s bank account — generally within 24 to 48 hours.  (70% for construction and 80% for most others.)

•  The factoring company will send the original invoice and an Authorization Letter to the Vendor’s customer advising them that the invoice payment should simply be redirected to the address given.

•  When payment is received by the factoring company, the Vendor is sent the remaining 20 or 30% balance less the factoring fee which is based on the amount of time the invoice takes to pay and was previously agreed upon and acknowledged by the factoring company and Vendor.

 What Modern-Day Factoring does NOT do: 

• It does NOT change the payment terms of the Vendor with its customer.  The Vendor’s Customer does not need to pay any faster and the name on the check stays the same.  The address to which the payment is mailed is all that changes.
• It does NOT change the day-to-day contact between the Vendor and its customer

• It does NOT work as a collection agent.  Even though the Vendor’s customer will be sending payment to the factoring company, the factoring company will not be calling it to collect payment.  If payment is not remitted for some reason, the factoring company will work with the Vendor to reclaim the funds.

 General Advantages: 

• No long-term contracts
• No financials required
• Flexible
• Access to prompt funding
• Fuel for the fast-growing Company 

Now let’s look at an example:

From Bibby Financial:

“Staffing Firm Employs The Right Solution

Founded in 1993, Prime Staff is a fast growing staffing consultancy that provides temporary staff for the construction, industrial, engineering and commercial sectors.

Prime Staff found that the inherent challenges experienced by the staffing industry are often exaggerated by the banks’ inflexibility to provide the higher levels of funding required by firms operating in the high value temporary market.

Prime Staff’s Managing Director, Danny McIntyre explains, “Cash flow is always a major strategic challenge for staffing companies. We pay our temporary workers weekly and also invoice our customers weekly. However, we often have to wait 30 days for payment, so cash flow problems are inevitable.

“We looked at a number of finance options before our accountants recommended receivables funding. Bibby Financial Services impressed us with their commercial awareness and understanding of our industry and we opted for a receivables funding facility. This facility releases up to 85 per cent of the value of our invoices as they are raised, giving us an ongoing supply of cash linked to our sales. They then chase up the outstanding amounts from our customers, paying us the balance of the invoice less their service fee.” 

The benefits of receivables funding within the staffing industry are profound. It has allowed Prime Staff to take on a greater number of contracts with more staff placed because it enables them to pay their temporary staff. The collection service allows the company to focus on its core skill of placing people in jobs while Bibby ensures that payment is received.

Danny adds, “Receivables funding is now incorporated into Prime Staff’s long-term business strategy. Our relationship with Bibby Financial Services has allowed us to develop plans for the future which include the launch of three new offices, and to double turnover in the next three years. Bibby Financial Services are fully supportive of our plans to expand and we are on target to meet our goals.” 

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We have plenty of business, but what we really need is cash to run our business!”

Have you ever heard a frustrated business owner utter this remark? Or thought it yourself?

What would you say if I told you I could help you or that other frustrated business owner get that cash to keep that cash flowing in your business — keep your business up and going and running smoothly so that you can do what you do best — run your business?

Okay….got your attention?

Well, let me introduce you to a fast-growing source of cash for growth-oriented and cash-hungry small businesses — factoring of accounts receivable.

“So, what exactly IS factoring of accounts receivable?” you ask.

Factoring is the conversion of a company’s commercial accounts receivable into immediate cash by selling those accounts at a discount. With factoring you can get 70 to 80% of an invoice’s face value wire transferred into your account within 24 to 48 hours of the invoice being issued and approved. Pretty, useful, huh?

Better yet - factoring is not a loan! With factoring there is no interest to pay, nor principal to repay. No liability will appear on a company’s balance sheet due to its factoring. A company simply sells one of its assets (accounts receivable) for an agreed-upon “fee” to obtain a more liquid asset (cash) thus self-financing it’s own growth with debt-free funding. It’s equivalent to when you sell your vehicle (an asset) to someone — the two of you agree upon a price and the transaction is done!

Since factoring is not a “loan,” funding is not based on a company’s ability to repay the amount advanced. Rather, funding is based on the ability of the company’s customers to pay what is owed the company for the purchase of the company’s goods or services.

Unlike traditional funding sources which require all the assets a business has available for collateral on a credit line, factoring is, in essence, a Receivables-Based Credit Line, which needs no other collateral. It is available to be drawn on when and as needed. In fact, a business can conceivably have a credit line with its bank with its other assets as collateral and a second credit line with a factoring company with the receivables ONLY as collateral! Interesting…?

With factoring, you can have cash on demand to meet seasonal demands, accommodate new and larger clients who may demand longer terms or use up any excess working capital you have on hand. Factoring, in essence, gives you the option of offering terms to your customers thereby helping you to increase your customer base.

Prior to the 1980’s, factoring was used primarily in the garment, textile and furniture industries and was only otherwise available to “big business”. At that time (as with many things), the terms and prices were much different than what they are today.

Due to the increased competition and visibility of this very viable financial tool, however, these have changed for the better. The terms and prices we see today make factoring a quick and viable alternative funding tool for small businesses nationwide so that they, too, can take advantage of this proven, debt-free and flexible method to effectively multiply working capital.

SOME HIGHLIGHTS/ADVANTAGES TO FACTORING:

• No financials required — MUCH less paperwork than traditional sources (oftentimes this can be done by fax or email and no personal “appearance” is required by the business owner);

• Quick account setup - usually 5 business days (sometimes faster);

• Usually can have 70 to 80% of invoice amount wire transferred to your account within 48 hours after approved;

• No long-term contracts, you factor as much or little as needed;

 

Why don’t YOU make this a year of growth and increased profits by using this financial tool to enhance your business!

Please contact me for a free, no-obligation consultation at 225-247-4370 or dmaples@yourcashflowconnection.com. Please also see additional information on my website: www.yourcashflowconnection.com.

 

 

 

 

 

 

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Tags: cash hungry, cash poor, growth-oriented, receivables based credit line, small business

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