The truly amazing Recession and resulting credit crunch provides caused banks to reduce access to loans and rescind lines of credit. These results are still being felt today. In order to compound the problem, many companies discover that their suppliers are demanding payment sooner while their customers take longer to pay on invoices. But they are expected to make payroll, spend taxes and meet expenses RIGHT NOW!
In this perfect storm of economic turbulence, how do you survive?
The answer may lie in a funding service utilized by Fortune 500 companies but that will, oddly, is relatively unknown in the small and medium size business marketplace. The method is a highly effective process known as “factoring. ”
What is Factoring?
“Factoring” is a financial tool for company that provides access to working capital with no adding debt.
Factoring, by description, is the process of selling commercial balances receivable at a discount. It allows a business to extend payment terms of thirty or more days to the customers without having to wait that long to receive its cash. It stabilizes cash flow and provides the working capital to get on with the business of doing business. The program is straight forward, cost effective, easy to carry out and tax deductible.
Depending on the conditions, factoring may be the ideal financial device.
How does the process work?
Companies along with B2B transactions are candidates regarding factoring. Once product or service has been delivered and invoiced, the invoice could be sold for cash. The majority of the invoice worth is transferred at the time of sale. The factoring company will interact with the recipient of the product or service to get them remit payment directly to all of them. Once payment is received, they deposit the balance of the invoice value (less the fee) into your bank.
Not every company qualifies for the service, but the probability of qualification is a lot higher than other financing options (such as a bank loan).
The reason has to do with the three-way relationship of invoice discounting services. There are three parties inside a factoring relationship: you, your clients and the factoring company. Where a bank will scrutinize your credit before providing a loan, factors scrutinize your own customer’s credit because they are the party responsible for honoring the invoice. The particular underwriting criteria are different, and in several ways, more liberal than those of the bank.
Top-tier invoice discounting companies also provide two other beneficial services to their clients – credit score assessment of prospective customers and receivables management. In essence, they become your own outsourced A/R Department.
Here’s exactly why that’s important: In small plus medium size businesses, the stress to accept a prospective customer, simply because they wish to buy, is very strong. However , doing business with a poor credit risk organization can seriously endanger a business. The factoring company helps minimize that risk by performing credit tests on each of your prospective customers.
Furthermore, by managing the accounts receivable process, they work with your customers to make sure that everything about the transaction is in purchase. They handle receipt of transaction and depositing of funds. Having the factoring company do this work indicates you do not have to hire someone to handle these functions.
Is Factoring Right for Your company?
Factoring has been an integral part of growing businesses for centuries. It was a major component of the economic growth of the American colonies in the seventeenth and eighteenth hundreds of years and is often used by today’s mega-corporations.
As a financial tool, factoring is frequently used a) by early stage companies, b) in times of rapid firm growth or, c) in times of economic stress. For early stage businesses and during rapid growth the demand for cash is often a lot greater than the cash on hand. In times of economic stress credit is tight plus customers take longer to pay.
These are realities of the business cycle. The advisable business owner will recognize the reality and take action to navigate his or her organization through turbulent economic waters
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