In simplest terms, a factor is anyone who transacts business for someone else. Factoring (also known as debtor finance, cash flow finance, invoice discounting) has been a major component of business capital raising since the 1700s. Since then it has survived economic booms, recessions, and depressions. Nowadays, businesses often have misconceptions about, or overlook completely, how they can benefit from factoring. One of these misunderstandings is that only a financially weak company would factor their book debts.
While that occasionally happens, factoring is more often than not done by companies who are focused on growth. These are the businesses that need improved cash flow so that they can receive discounts from suppliers, prepare their inventory for peak seasons, upgrade equipment, and produce and sell more goods or services.
Traditionally, a debtor who takes a long time to pay an invoice causes the quick business funding to lose money due to financing, staff, and overdraft. Factoring can be a solution to this issue. Customers can use factoring on their accounts receivable in order to avoid incurring debt. When they do this they do not borrow money. The book debts of a company are bought by the factoring company. The factoring company receives a discount. The other company gets the cash from the selling of the accounts receivable. This allows them to be paid quickly and avoid the problems of a lengthy invoice.
Factoring can be beneficial to any company that operates using accounts receivables, whether they are a wholesaler, manufacturer, distributor, or in the service industry. Companies that are new, have a negative net worth, or are growth oriented will be helped the most by factoring. This is because the cash from it can end losses from operating, allow prompt payment of creditors, or be used to increase sales and production.
Recession. Cash flow crisis. Small business bankruptcies. Interest hikes. Words and phrases like these are common in the current economic environment. Now is a stressful time for a business owner. Cash flow is negatively affected by these trends. It is also hurt, no matter the companies size, by restrictive lending policies, slow payments from debtors, and the payment pressures from creditors.
When cash flow is unable to provide for growth, business owners struggle to raise working capital. One choice is to turn to a bank, but financial institutions are only willing to lend against the security found in a bricks and mortar. Another possible solution is to take on a partner who will bring capital in exchange for equity and partial control of the business.
If neither of these options is appealing, or possible, factoring can be used to convert credit sales into cash and provide a business with instant capital.
Factoring Can Be the Answer to These Situations;
* Cash flow that is unpredictable.
* Low paying debtors.
* Inability to collect debts due to staffing limitations.
* Unable to meet lending criteria from banks.
* Insufficient cash flow.
* Unable to fulfill large orders due to poor cash flow.
* Lending limits reached.
* Overhead is high.
* Accounts receivable takes up too much of management’s time.
* Poor management strategies for accounts receivable.
* Unwilling to take on more debt.
* Unable to invest in new equipment because of low cash flow.
* Low cash flow makes supplier discounts out of reach.
* Lack of credit checking procedures.
Who Benefits from Factoring
Growth Oriented Companies – The additional cash from factoring can boost profits, allow production expansion, or increase the number of clients.
Companies Unable to Secure Bank Financing – Factoring focuses on the ability of the debtors to pay rather than the factors that banks judge on. Neither company assets nor the owner’s ability to repay a loan need to be evaluated for factoring financing.
Companies with Tax Problems – If immediate cash is needed to make tax payments, factoring can be used.
Companies Needing Additional Capital – Additional capital can be obtained quickly by using factoring.
Sales and Production Increases – The additional cash flow that factoring provides can be invested into the company so that it may take on larger orders and purchase any equipment needed for expansion. This increased production can lead to more profits for the company.
Purchasing Power Increased – Bulk purchasers often get discounts that smaller companies cannot normally qualify for. The capital gained from factoring can be used for large orders that will allow the company to get supplier discounts.