Small Business Factoring

Bill Henthorn asked:


There are many ways to finance your business. Your own money that you have saved over time is the most obvious, but if that is not available then other sources must be found. Relatives and friends could be a source for temporary funds, but usually not long-term loans. Reliable long-term financing of a business is something that all businesses face at sometime during their life.



Cash flow



Cash flow is without a doubt is the biggest problem that all businesses must face. It does not matter the size of the company. The bigger the business, the bigger the cash flow problem. A growing young business is very likely to experience cash flow problems. The luxury of ready cash is one that comes with time and success for a business. In the meantime there is a need to get short term financing so the business can operate. If the owner’s savings have already been tapped, then other sources must be found. If the owner has a good credit rating then the bank may consider a signature loan to the individual and not to the business. The bank could also give a revolving line of credit that is backed by real estate or stocks.



SBA loans and factoring



Another way to get financing is to see if you can qualify for a SBA loan. This loan is again made to the individual and not the business. These are not quick to get or easy to get for the business borrower. Without some assets, you are not likely to qualify for such a loan. Further down the list of ways to get money for the business is to factor your account receivables. This can be easily done if you are selling to quality clients. Each factoring company has its own rules and what invoices they will accept for loans. These loans are limited only by the amount of your invoices and their quality. If all of your jobs are custom in nature, then you could demand a 50% deposit on all work you accept.



Angel financing



Another source of money is seeking out what is known as angel financing. This money comes from wealthy investors who are seeking out promising young companies that should prosper if they have the money that is needed. There are several advantages to this financing, as it does not have to be repaid until the company is taken public or becomes so successful that the angel can be bought out. When you accept an angel you in affect take on a partner. This is not all bad as the angel could have contacts to grow your business. Successful individuals like this cannot only bring in capital, but also business expertise that could help your business grow faster and with a more solid base.

You can find these angels by looking on the Internet or asking bankers or brokers in your area. They exist everywhere, but are usually found in bigger cities.



Bring in a partner



You can advertise for a partner to come in and help you grow the business. There are people in every city that are looking for a business opportunity that have money for the right situation. This is a longer-term answer that should be considered only if you feel the person that you are considering would be someone you could live with. Do not swap a temporary problem for one that will be long term in its effect. Partners in a business are similar to partners in a marriage. There are good unions and bad ones. You never know for sure what you are getting until later.

Private personal loans can be obtained, but the interest rate that will be charged will be higher than what the bank will charge. Second mortgages on real estate are usually rather easy to obtain if there is sufficient equity in the property. The problem with all of these loans is they are made to the owner and not the business. If the business fails, the owner is still liable for the loan. When a business is very successful the banks and other lenders will make the loan to the business without the backup of the owner. But that will not be the case with a young growing business.

There are many options for raising money to finance a business. The problem with all of them is they depend on having assets, good credit or significant cash flow when compared with the loan size. There are very few options that do not tie up the business’s assets and the owner’s. Few lenders will make loans to the business by itself. One of the few loans made to the business is factoring loans. Using the invoices as collateral for the loans makes this possible.



Private offering to friends



Another method to raise money is to make a private offering of stock to a small group of investors. This is easier said than done, but it is possible if you have the right group of people available. It has to be a small group or it would be considered a public offering and not a private investment. The rules are very stringent on this type of stock offering. Get good advice before you attempt it.

A business cannot thrive if it is under financed for long periods of time. This problem must be resolved and the sooner the better. The struggle to live within the cash flow stream is one that all businesses face and it can make it extremely difficult for the business to prosper if they are always fighting the finance battle.

Solving this problem is worth the time and trouble, as it will allow the business to have some breathing room and enjoy its growth. All possible solutions should be explored, as some are more of a fit than others. Obtaining fresh capital is always the way to go if the payback is not onerous. Getting the money is always the goal, but it has to make economic sense over the long run. Be careful not to jump from a small fire to a big fire that can consume you and your business in debt.

Once the financing issue is under control, a business owner has the capability of growing the business in a manner that is sustainable. This is the goal of every business. Financial control is a precursor to successful growth, which can be carried forward into the future. When financing concerns are put in their place, the business will be able to grow with fewer problems or at least not those of a severe financial nature. Cash flow must always be watched and managed so the bills can be paid in a timely manner. Maintaining a good credit rating is always in the company’s best interest.



Seller Financing



Up to 90% of businesses sold are financed in some way, by either the seller or from other outside sources. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price. Read our article on the seller financing basics for more information.



Conclusions



Financing a business is never easy and a young business faces even more difficult problems to overcome. If the owners have money then the problem is fairly easy to solve. If there are no assets or extra money available all sorts of schemes will need to be played out in order to live with money short falls. Short-term money will need to be found from many sources. The ideas presented have been used by many businesses to overcome short-term money crunches. Surviving over time seems to allow the company more room. Every money crunch that is resolved will ease the problem for few days or even weeks. As a business grows, the money problems will always be there, but maybe not as severe in nature.



For Commercial Finance Loans – Factoring Loans * Equipment Financing * Purchase Order Finance * Commercial Mortgage – IMM Financial has been in the Commercial Finance Business serving companies just like yours for over 14 years. Put our experience to work for you. We are the Cashflow Specialists.

printman asked:


i need to know if there is a service that will buy invoices…not a factoring company, but someone who will actually buy the invoices then be responsible for collecting of the money

Small Business Factoring * Equipment Leasing * Commercial Mortgage

Kris Koonar asked:


For the growth of your business or to meet the cash flow shortages, you have to struggle to attain capital. But, for small business houses, if the loan and credit are limited, then you can opt for accounts receivable financing. Account receivable financing is selling your invoices at a discount to a factoring company, which is prepared to take risks on the receivables and offers instant cash.

Extending payment terms is quite common in the business world. Your company is bound to run in problems, unless you have sufficient cash for business expenses such as rent, salaries and suppliers. The ultimate result would be, either you will settle for low pay orders to conserve cash or delay the payments of your staff and key suppliers.

Obtaining a business loan from bank is quite difficult, unless you have a good record and substantial assets. Banks only lend to organizations, which can provide a profitable operations for many years and a detailed financial statement. Apart from the loan, there would also be a fixed amount. For additional expenses, again you may have to go through the same process.

So the best option would be going for accounts receivable financing also known as factoring, which will pay you immediately to meet your business expenses. Moreover accounts receivable financing can be easily obtained than a bank loan. The work process of receivable factoring is quite simple. It gives you an advance payment, which ranges from 80 to 90% of the invoice depending upon the kind of industry and your clients. Now this advance helps you to pay the current expenses rather than waiting for the delayed payments from the clients. The remaining transaction that is 10 to 20% with a deduction of factoring fee is settled as soon as your client pays the open invoice.

Factoring fees are determined by the amount of financing you receive and on the payment reliability of customers. The monthly cost may vary from 1.5% to 3.5%. Accounts receivable is a cost effective solution and a best tool to make financing and sales grow in your organization. This accounts receivable will also help you to go for better pay orders too.

One of the major benefits of accounts receivable financing is the flexibility. The financing lines of your organization by the invoices you submit are tied directly to your monthly sales. This means that as your financing line increases your business grows. This will provide you cash and enables you to maximize the sales opportunities. Accounts receivable financing helps you to maintain a steady cash flow in your organization. It increases working capital of your business.

You now have control on your money, even if your clients pay after 30 or 60 days. Your running expenses can be easily taken care of. Due to this increased working capital, the factoring financing availability grows automatically. Unlike banks, you don’t need approval every year for additional funding and have a 30 day rest period every year, before drawing on a line. Moreover, you don’t have to pay any kind of monthly loan payments. You can take advantage of trade discounts, which are offered by the suppliers. Now you can concentrate more on the company’s growth than on managing your receivables. This will lead you on the road of success.



For Commercial Finance Loans – Factoring Loans * Equipment Financing * Purchase Order Finance * Commercial Mortgage – IMM Financial has been in the Commercial Finance Business serving companies just like yours for over 14 years. Put our experience to work for you. We are the Cashflow Specialists.

Marco Terry asked:


For product distributors, cash flow is always a big concern. Unless you have been in business for a long time, most suppliers will insist that you pay them soon after delivering the goods. Or worse, prior to delivery. However, most of your clients will insist in paying your invoices on net 30 or net 60 days. This creates a simple problem – you have to pay suppliers quickly, but clients pay slowly. Although your business may be profitable, unless you have adequate working capital, you will have cash flow problems.

When faced with a cash flow problem, most business owners try to get a business loan. Although business loans can work well in many situations, they can be inflexible especially if your business has growing capital needs. Also, qualifying for a business loan can be difficult since institutions usually require substantial collateral and track records showing profitable operations for many years. This makes them a tough option for new or small businesses.

But there are better solutions though. Let’s examine the situation. The problem is the time delay between having to pay your supplier and getting paid by your client. What would happen if you could reduce the time delay? For example, let’s say that your client paid you in two business days rather than two months. Would that solve your cash flow problem? For most, it would.

You can achieve just that by using factoring.

The value proposition of invoice factoring is simple. It reduces the time delay between delivering goods and getting paid. This puts your business in a better cash position and enables you to take on new opportunities.

Factoring involves selling your invoices to a factoring company. The factoring company buys your invoices in two installments. In the first installment, you get 80% of the invoice advanced to you. You get the remaining 20% (less a fee) as a second installment, once your client actually pays for the goods.

One of the advantages of factoring accounts receivable is that is a very flexible solution, where the maximum amount you can finance is mostly determined by the ability of your clients to pay your invoices. Said differently, your factoring financing line is tied to your sales and grows with your sales. Because of this, small companies that do business with large credit worthy clients can benefit from using factoring.



For Commercial Finance Loans – Factoring Loans * Equipment Financing * Purchase Order Finance * Commercial Mortgage – IMM Financial has been in the Commercial Finance Business serving companies just like yours for over 14 years. Put our experience to work for you. We are the Cashflow Specialists.

Cash Miller asked:


xactly is accounts receivable factoring? Well very simply it is the process of obtaining funds by selling your company’s accounts receivable. To go into a little more detail a company takes the outstanding invoices it is owed and sells them to a third party company called a factor. By doing this the company selling the invoices receives an up front payment on the invoices instead of waiting thirty or more days to be paid. When the invoice does come due the payment is sent to the factor instead of your company. Sounds great right? Well it’s not all roses. If you’re considering going this route you need to be careful. Researching possible factoring companies thoroughly is very important. If you don’t you might pay a pretty hefty price.

Now depending on whom you talk to the accounts receivable factoring business is either the greatest thing since sliced bread or in the neighborhood of borrowing from a loan shark. Each experience is different and some companies are on the up and up while others you won’t want to touch with a ten foot pole.

So you can better understand the experience we’ll walk you through what happens. Now assuming you’ve got a factor you’re intending to work with we’ll start from the point of the sale. You’ve just finished a large project for a customer. You issue your bill to them. The first thing the factor is going to want to see is someone’s signature that shows they were satisfied with the work. But let’s say you sold them a product that was delivered at the dock. A receiving clerk’s signature is not going to cut it. You’re going to need the signature of the person that authorized the purchase to begin with. They are going to need to sign the invoice and probably another document that verifies the purchase was legitimate and they plan to pay for it.

Next you’ll need to fax those documents to the factoring company. But you can’t do this from your office because you might have forged those signatures. No they need to be faxed from the customer’s office. And once the factoring company does receive the documents they may still want to call and verify the purchase. Now if the purchase was for a significant amount of money all this hassle may be worth the trouble but what if the purchase was for a few hundred bucks. Not worth the trouble you say? Well we have a problem with that too.

You see when you first sign up with a factoring company they want to know what companies you do business with. And which of those you want to have the invoices factored. This is because those companies that you decide are worth factoring have to be notified that this is going to be the case. And the factor will want to run a credit check on the company. Your customers will also be notified that they must now send their payments to the factoring company instead of you. This task also will be left up to you. The problem is that if you do not factor an invoice the company you are billing must still send its payment to the factoring company and not to you. This will actually cause that particular payment to take longer than necessary to reach you because it will go to the factor first and they have to release it to you.

Once your invoice has been submitted to the factor from your customer’s location you need to check and make sure it was actually received and there are no problems with it. After the factor receives the invoice it should only take about twenty-four hours to be approved. Most factors have a cut off time each day to receive an invoice if you want to receive your money the next day.

After the factoring company has approved the invoice you will receive a wire transfer to your bank. From there the money is yours to do as you will. Many factoring companies want you to beleive that using accounts receivable factoring is the perfect way to get the money you need to grow your business. The truth is that it is not suitable for many types of businesses. Your billing methods need to be very straight forward to help make factoring work. And it helps if you are issuing fewer invoices but they are worth more money. Otherwise the leg work involved can take you away from what truly matters. And that is focusing on your business.



For Commercial Finance Loans – Factoring Loans * Equipment Financing * Purchase Order Finance * Commercial Mortgage – IMM Financial has been in the Commercial Finance Business serving companies just like yours for over 14 years. Put our experience to work for you. We are the Cashflow Specialists.