FREQUENTLY Invoice Factoring Articles
|Invoice Factoring. Cash Without Borrowing|
|Invoice Factoring. How Can You Help My Business|
|Invoice Factoring. Quick Needs/Benefits Analysis|
|Invoice Factoring. The Percived Cost Versus The Actual Real Cost|
|Invoice Factoring Article. What is Factoring/Off-Balanc Sheet Financing|
|Invoice Factoring Article. Saving Taxes Through Invoice Factoring|
|Invoice Factoring Article 7|
|Invoice Factoring Article 8|
|Invoice Factoring Article 10|
|Invoice Factoring Article 12|
|Invoice Factoring Article 13|
How to Increase Cash Flow Without Borrowing
Cash flow is one of the main reasons businesses fail. At one time or another, every business, even successful ones, have experienced poor cash flow. Cash flow does not have to be a problem any more. Do not be fooled -- banks are not the only places you can get funding. Other solutions are available and you do not have to borrow.
What is Factoring?
One solution is called factoring. Factoring is the process of selling accounts receivable to an investor rather than waiting to collect the money from the customer.
Oh, the Irony…
Factoring has an ironic distinction: It is the financial backbone of many of
's most successful businesses. Why is this ironic? Because factoring is not taught in business colleges, is seldom mentioned in business plans and is relatively unknown to the majority of American business people. Yet it is a financial process that frees up billions of dollars every year, enabling thousands of businesses to grow and prosper. America
Factoring has been around for thousands of years. Factors are investors who pay cash for the right to receive the future payments on your invoices.
An unpaid receivable or invoice has value. It is a debt your customer has agreed to pay in the near future.
Although factoring deals exclusively with business-to-business transactions, a large percentage of the retail business uses a factoring principal. MasterCard, Visa, and American Express all use a form of factoring in their retail transactions. Using the purest definition of the word, these large consumer finance companies are really just large factors of consumer paper.
Think about it: You make a purchase at Sears and charge it to your MasterCard. The store gets paid almost immediately, even though you do not make payment until you are ready. For this service, the credit card company charges Sears a fee (typical fees range from two to four percent of the sale).
Factoring can offer many benefits to cash-hungry companies. Rather than wait 30, 60, 90 days or longer for payment on a product or service that has already been delivered, a business can factor (sell) its receivables for cash at a small discount off the amount of the invoice.
Payroll, marketing efforts, and working capital are just a few of the business needs that can be met with this instant cash.
Factoring provides the means for a manufacturer to replenish inventory and make more products to sell: There is no longer a need to wait for earlier sales to be paid. Factoring is not just a cash management tool for manufacturers: Almost any type of business can benefit from factoring.
Generally, a business that extends credit will have 10 to 20 percent of its annual sales tied up in accounts receivable at any given time. Think for a moment about how much money is tied up in 60 days’ worth of invoices: You cannot pay the power bill or this week's payroll with a customer's invoice, but you can sell that invoice for the cash to meet those obligations.
Factoring is a fast and easy process. The factor buys the invoice at a discount, usually a few percentage points less than the face value of the invoice.
People consider the discount a small cost of doing business. A four-percent discount for a 30-day invoice is common. Compared with the problem of not having cash when you need it to operate, the four-percent discount is negligible. Look at the factor's discount as though your business had offered the customer a discount for paying cash. It works out the same.
Companies consider the discount the same way they treat a sales price: It is simply the cost of generating cash flow, much like discounting merchandise is the cost of generating sales.
Factoring is a cash flow tool used by a variety of businesses, not just those who are small or struggling. Many companies factor to reduce the overhead of their own accounting department. Others use factoring to generate cash, which can be used to expand marketing efforts and increase production.
Why Factoring Appeals to the Start-Up
Factoring is especially appealing to young and rapidly growing companies. Since the process shortens their business cycle, these businesses can grow faster. The ability to make more products to sell while waiting for invoices to be paid is largely eliminated. Such businesses usually net much more profit with factoring than without, even when the discount is considered.
Factoring vs. Bank Loans
So, why not simply go over to the friendly banker for a loan to alleviate cash flow problems? A loan can be difficult if not impossible to receive, especially for a young, high-growth operation, because bankers are not expected to decrease lending restrictions soon. The relationships between businesses and their bankers are not as strong or as dependable as they used to be.
The impact of a loan is much different than that of the factoring process on a business. A loan places a debt on your business balance sheet, which costs you interest. By contrast, factoring puts money in the bank without the creation of any obligation. Frequently, the factoring discount will be less than the current loan interest rate.
Loans are largely dependent on the borrower's financial soundness, whereas factoring is more interested in the soundness of the client's customers and not the client's business itself. This is a real plus for new businesses without established track records.
There are many situations where factoring can help a business meet its cash flow needs. It provides a continuing source of operating capital without incurring debt, which can result in growth opportunities that dramatically increase the bottom line. Virtually any business can benefit from factoring as part of its overall operating philosophy.
Every good businessperson must understand the concept and benefits of factoring in order to operate as profitably as possible. The following chart can help you understand the differences between factoring and other sources of funding.
“What would you do if you had access to cash immediately instead of having
to wait 30, 60, 90 days, or longer to receive payments from your customers?”
“Did your bank reject your loan application or require you to pledge
additional collateral that you did not have?”.
“Have you ever missed out on a significant growth
opportunity because your cash flow is slow?”
If the Answer is YES to any of these questions,
“Well then, I think factoring is a good option for your business.”
2. What is invoice factoring?
In a nutshell, invoice factoring consists of converting a company’s accounts
receivable into cash by selling invoices to a factor at a discount. Factoring is
a valuable financing option for companies who are just starting out or who
are experiencing a period of rapid growth. Because invoice factoring companies
rely on being paid by your customers, your own financial history does not have
any bearing on your qualification. Most importantly, factoring allows your company
to stop worrying about cash flow and start focusing on
what really matters in a business — operating it.
3. What does all of this terminology mean?
Eight fundamental terms to you understand the
factoring process better.
- Account creditor: another name for the client
- Account debtor: another name for the clients’ customers;
the entity that the factor collects from
- Accounts receivable: money received or owed to the client
- Accounts payable: money the client pays out or owes
- Advance rate: the percentage of money that a factor advances its
clients upon the sale of its invoices
- Discount fee: a fee that the factor charges when purchasing an invoice
- Reserve: the percent advanced, less the factor’s discount fee
4. OK, I understand the concept of factoring, but how does it work?
Factoring is a way to fill the gap between when a company invoices its
customers and when it receives payment for its services. Describing the factoring
process can easily be accomplished by referring to a diagram, like the one below,
or by describing a short series of steps:
- The customer requests goods/services from ABC Company.
- ABC Company delivers the goods/performs the services.
- ABC Company issues an invoice to their customer, and then
the invoice is sold to a factor.
- Upon verification of invoice, the factor advances cash on the sold invoice.
- ABC Company’s customer pays the factor.
- Upon receipt of payment, the factor will release the difference (reserve)
between the collected amount and the advance, minus the factor’s discount fee.
5. What’s in it for me?
- Immediate access to cash upon the sale of valid invoices
- No liability on the company’s balance sheet
- Ability to eliminate unnecessary overhead
- Leverage off of the company’s customers’ credit
- Early payment discounts
- Build the business’ credit
6. But what will my customers think if I start doing business with a factor?
Although this is a common concern for many companies who are
considering invoice factoring, it need not be.
A lot of your customers may already be familiar with factoring. Factoring is one of
the oldest methods of providing working capital to help businesses solve their cash flow needs.
In fact, credit card transactions are the most common form of factoring used today.
Some of the largest corporations in the world benefit from factoring millions
of dollars of their accounts receivable every year.
Your customers will most likely view the factoring relationship positively because it demonstratesFinally, when a company establishes an active relationship with a factor, all parties benefit.
that the company’s finances are secure enough to establish a line of credit. Working with a factor
delivers an important message to your customers — that the business
is solid, rapidly growing, and in high demand.
Your customers can continue to receive the business’ goods/services, and they can
do it while waiting 30, 60, 90 days, or longer to pay. In the meantime, you get the benefits
of having money today, therefore permitting a healthy business relationship on both ends
If you have these needs then
invoice factoring can solve them:
- To not have payments show up on
debt to Income ratio or credit report
- To not have to borrow money to make payroll
- To have cash to purchase supplies to manufacture
materials to sell at a profit
- To have greater ability to get more cash as needed
Invoice factoring benefits are:
- Invoice factoring companies will buy the invoices for cash
- Since this is a purchase, it will not affect the debt-to-income
ratio and will actually improve your credit report
- The purchase will provide cash to purchase supplies; with cash,
you can make volume purchases and get a large discount
- The faster your company grows, the more factoring can help it.
- This will relieve the your stress about needing cash and being able to pay your bills
The Perceived Cost of Factoring Versus The Actual Real Cost
One of the most common mistakes clients and their advisors make regarding
invoice factoring is in miscalculating the interest cost of their program. Having made the
calculation error, the client mistakenly believes the cost to be double digits and has
an emotional response as if being cheated, “Gee, that’s 18 percent a year. I’d never
do that (you’re cheating me).” Feeling that he is being treated unfairly, the client dismisses a potentially valuable finance option.
Clients need to have a clear understanding of what invoice factoring is and
then to understand why it’s used, what services are provided, and finally, what the real cost is.
The basics of invoice factoring are quite simple: The client gives the invoice factoring
company his accounts receivable. The factoring company advances funds against that
paper then remits the balance of the money, less fees, when the receivable
is paid by the customer. Understanding some of the complexities of invoice factoring, however, enables you to better analyze its value.
Compare invoice factoring to the following real estate example. Assume that the
client owns a strip mall, a dozen or so shops in a small shopping center, and goes to the bank for a $2,000,000 mortgage on the property.
The bank looks at the financial statement of the mall and sets a mortgage based on the property’s income stream, real estate location, and other considerations regarding the property’s general condition. Then the bank reviews
the location’s information and finds that the tenant files are in poor order, credit checks on the tenants are mostly missing, and postings to the rent
roster are late and frequently inaccurate.
As a result, the bank cannot offer
such a large mortgage and suggests only $1,500,000. The client, very much like someone trying to get a working capital line of credit, either accepts less
money than he needs or must seek a different financial solution.
One option may be to seek the professional management of property by a real estate company that could also provide the new mortgage. The management company, now in charge of the property, can begin to collect rents in a timely fashion, determine the creditworthiness of the tenants, collect aged items, and accurately post collections on a timely basis.
Being in direct control of the asset, the management
company can feel comfortable in providing a larger mortgage than the bank. The mortgage interest rate would be set, and of course, there would be a fee for managing the property. It is at this point that the client misinterprets the fees. The client combines the property
management fee and the finance rate on the mortgage and perceives it to be an extraordinary internal rate of return.
The invoice factoring company essentially becomes the property manager of the receivables asset.
All receivables sent to the factoring company come under its management.
The creditworthiness of the customers is checked, invoices and payments are
posted in an accurate and timely manner, monthly statements are sent to customers
by the factoring company, and late-paying customers are brought more in line with that
industry’s normal pay cycle. For these receivables management services,
the factoring company charges a management fee, exactly as would the real estate manager in our example, and interest is charged on the funds advanced.
The total cost of the service is, of course, the sum of the two items, but combining the receivables management expense with the interest on the money would be like adding your home repair,
gardener, pool maintenance, and all other property upkeep to your mortgage bill and calling it interest.
A client can obtain a credit facility equal to 80 percent to 97 percent of his accounts receivable, and the amount of that facility can continue to expand proportionally, allowing him to always having the working capital necessary to meet expanding business.
Understanding the difference between the innoice factoring company's management fee and the interest rate charged on the money advanced is extremely important psychologically.
If one mentally combines those fees and calls it interest, the feeling of being treated unfairly prohibits a logical analysis of the potential benefits of obtaining needed working capital.
What is Factoring/Off-Balance Sheet Financing?
You MUST have control of your cash flow.
Do not be held captive by your customers’
delaying the payment of your accounts receivable.
“A journey of a
thousand miles begins with the first step.”
Let us help you with your first steps.
like the answer to this question?
If my customers would just pay me today, I’d have enough money to . . . !
Invoice Factoring may help you gain the answer you need to this question.
What is invoice
In its simplest form, factoring is the purchase and sale of a company’s accounts receivable (invoices) at an amount less than (a discount of) the face value.
(Example: If the factoring discount is 3 percent, the invoice is being purchased for 97 cents on the dollar). This allows a company to convert its dormant assets — or invoices — into useable cash flow. It is not a loan.
How does it
Company ABC sells products to Company XYZ for $10,000. XYZ accepts delivery of the product and is then invoiced by ABC. ABC now waits for XYZ to pay the invoice, in most cases, for 30, 60 even 90 days. ABC sells the receivable
to a factor who disburses funds to ABC in an amount equal to approximately 80 percent of the face value of the invoice ($8,000).
The remainder of the invoice’s value is held back in case XYZ does not pay the whole amount due. This amount will
be given to the ABC [minus the factor’s fee] upon payment by XYZ.
This process enables ABC to have the cash flow now rather than waiting until XYZ decides to pay the invoice. ABC now has the funds available for payroll,
operating expenses, taxes, expansion, discount purchases
or any other reason that it wishes to use the funds.
To become knowledgeable and understand some
of the terminology, we have listed a few of the basic terms:
Accounts Receivable:A group of invoices. Moniesowed for goods or services a companysupplied to customers
Invoices: Statement for paymentsent to a client’s customer or goods or services sold and delivered
Advance: Those monies transferred to the client when the factor buys invoices
Rebate (reserve): Amount of money held back from the original invoice value, which is sent to a client — minus the discount fee — only after the total value of the invoice is collected
Discount: A percentage charged for the service of extending monies based on a funded invoice
purchase of receivables by an invoice factoring company without credit liability to the client
Once the invoice is purchased, the factoring company assumes
full credit responsibility for its collection.
(Some exceptions may apply.)
Recourse: The purchase of receivables by an invoice factoring company with the seller retaining full liability for any invoices that remain unpaid in part or in full
Seller (Client): The company or individual that sells its accounts receivable (invoices) owed by various customers to whom the client has provided goods and/or services
company to whom the client (seller) has provided goods
and/or services and who owes money to your client for those goods and/or services
UCC-1: A document that is
placed on record with the Secretary of State or with the County Recording
Office. The purpose of filing this document is to evidence
the invoice factoring company's security interest in the client’s personal property.
His document is filed in the same state or county in which the client’s business is located.
What the Invoice
Factoring Company Looks for
In order to expedite the funding transaction with you and the
factoring company, it is important that all the paperwork is filled out completely.
With this in mind, the following are lists of what a factor looks
for to proceed with your funding process:
For Processing Toward Closing the File
Do you believethere are corporate tax benefits to financing the working capital requirements of a business? Those benefits exist, and this article introduces a taxable
income strategy .
First, let’s summarize the 2005 corporate tax rates (banks have different tax rates).
The federal corporate tax rates range from 15 percent to 39 percent of the taxable income with several tax brackets. The state corporate taxes rates range from
1 percent to 12 percent of the taxable income, depending on where the corporation resides (six states have no corporate income taxes).
With only this information, you can appreciate the following:
Taxes on corporate income are significant .
Taxes on corporate taxable income are dependent on which state the corporation resides in.. Many states that collect corporate taxes have flat tax rates and the rest have tax brackets..
Corporate tax rates do not always increase with taxable income , e.g., federal corporate tax brackets favor larger corporations.
Over Not over Tax rate
$ 0 $ 50,000 15 percent
50,000 75,000 25 percent
75,000 100,000 34 percent
100,000 335,000 39 percent
335,000 10 million 34 percent
10 million 15 million 35 percent
5 million` 18,333,333 38 percent
18,333,333 35 percent
It is important to note that corporations that have taxable income of $100,000 to $335,000 are in the 39 percent tax bracket.
Financing has a negative impact on the taxable income of a corporation because of the interest for loans and the discount fee for invoice factoring services.
On the other hand, because of the lower taxable income of either of these instruments, there are fewer taxes due to the federal and state revenue services. The amount of
income tax savings depends on the reduction in taxable income. It is obvious that any reduction in taxable income would recover some of the interest or the discount fee.
Let’s look at a business that is in the 15 percent federal income tax bracket and pays 6 percent state income taxes — a composite 21 percent tax bracket. Now, let’s also
suppose the business has a $1 million loan at 8 percent APR with a term of one year.
The question is: How much lower are the taxes due to the federal and state revenue services?
The interest paid during the year is $43,861.15. The taxable income is reduced by $43,861.15, and at the 21 percent composite tax bracket, $9,210.84 less in taxes are due to the revenue services. That means the business had a net interest of only $34,650.31 for the $1million loan — an effective 6.34 percent APR.
A business in the same 21 percent composite tax bracket that sells $1 million in accounts receivable in a year at a 4 percent discount would reduce the taxable income by $40,000.
The tax savings is $8,400, an effective discount fee of 3.16 percent.
Start by finding out the state corporate tax structure for your state.Most financial officers of corporations are already aware of and use the leverage that taxes have on debt so they can grow the business. When those same financial
officers are presented with a new debt or invoice factoring instrument, they often forget about the leverage that taxes play on a growing business.
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