By: Craig A. Ruark
A loan is a loan whether it is a government-backed SBA loan, a secured equity loan through a bank, or a personal loan through an associate, each of them has a principal and interest amount that must be paid back, either in a lump sum or over time.
Many times, companies may find themselves to be asset rich but cash poor. Business is thriving, and they have a healthy amount of account receivables on the books but are strapped for immediate cash.
One option for a quick infusion of cash is invoice factoring.
Receivables represent work completed (and money paid out), for which you are not yet paid. When you carry a large dollar amount of receivables, you become a bank for your customers. In turn, this can also hamper your ability to pursue lines of credit or conventional loans from your bank to fund growth or even continue operations.
A quick search of the internet will reveal over 100 factoring companies operating across the U.S. However, most of those companies either cater to very specific types of businesses and are operated by large financial institutions or corporations.
Invoice factoring is available to a business that invoices other businesses (B2B) or government agencies (B2G) and provides short-term working capital in exchange for selling and assigning invoices to a factoring company. In simple terms, the factoring company advances a business roughly 70%-80% of the invoice’s value when an invoice is purchased. Then, once the invoice is paid, the factoring company pays the remaining 30% to 20% (minus agreed upon factoring fees).
Factoring is not a loan, it represents work provided to a client in the form of a service or a product, and therefore the money belongs to the company. The invoice factoring company is simply advancing the money that the business has coming to it, in exchange for a small percentage of the amount owed.
According to David Cabral, President of Las Vegas-based Business Finance Corporation, “A factoring discount rate is determined by a number of variables such as the type of business you are in, (for example: construction is more expensive than manufacturing) the number of monthly invoices to be factored, the dollar amount of each invoice, the credit quality of your clients & their payment history, as well as other credit risks. In addition to the per-transaction discount rate, a factoring company may charge an additional monthly fee on accounts that require specialized services or customized financing.”
“Typical factoring discounts range from 3%-5% for 30 days. An invoice that is not paid within 30 days will accrue daily fees at 1/30th of the factoring rate per day. For instance, if your factoring discount rate is 3½%, and the invoice does not pay within 30 days from the date we fund the invoice, the daily fee would be 1/30th of 3 ½ % or .1167% per day. On a $1,000.00 invoice, the amount would be $1.17 per day,” said Cabral.
In many parts of the country, and in many industries, factoring is a routine and commonly used method of asset-based financing. It does not reflect badly on a business, and, in fact, it demonstrates to your clients that you actively and aggressively manage your business and your cash flow.
As with banks, there is a process to setting up an account with a factoring company and building a trusted relationship is important. Factoring companies generally look at three things, the current business financial statement (Balance Sheet & P&L), a current accounts receivable aging report, and three months of your most recent bank statements, before purchasing receivables.
Once a business relationship is established with a factoring company, a company can present only the invoices they want to factor, and the company will be approved for a monthly invoice factoring amount. At that point, the turn around time for factoring a group of receivables and receiving cash can be as short as 24 hours.