Factoring Financing Articles

If you ask the owner of a successful re-seller or importer company to identify their biggest challenge, their common answer will be: lack of working capital. Working capital is the lifeblood of all resellers and importers, enabling them to pay suppliers and allowing them to grow their businesses. Many times, their ability to grow is directly linked to their access to working capital.

So, where do re-sellers that wish to take their businesses to the next level go to get working capital? The bank? Unlikely, as banks are tough sources of business financing. To qualify for a business loan you’ll usually need to provide reports showing three years worth of profitable operations – and – the owner will need to have a spotless credit record. Oh, and if you are a startup, don’t bother. Few banks will provide working capital to startups.

Are there any alternate options? Fortunately, the answer is yes. Purchase order financing (commonly known as po funding) is a great source of financing for startups and growing companies that have exhausted their bank financing options. However, you won’t find PO Funding at your local bank, you’ll find it at your local factoring company.

PO funding is an ideal source of financing for resellers, wholesalers, importers, or just about any business that buys goods from third parties and resells them. PO financing covers up to 100% of your supplier expenses, enabling you to close big sales and deliver on them. As opposed to traditional financing, purchase order financing uses your purchase order as the actual collateral. There are no set maximum limits, and you can finance as many orders as you want, provided that they come from commercially credit worthy businesses or the government, and have profit margins of 15% or more.

Purchase order funding works as follows:

1. You get a purchase order from a client. You place an order with your supplier
2. The purchase order finance company pays your suppler using a letter of credit
3. Your supplier delivers the product and your client acknowledges receipt
4. Your client pays for the goods and the transaction between the parties is settled

Purchase order financing can be an affordable financing option that allows you to expand your business when your bank financing options have been exhausted. It can truly enable you to close very large orders, with confidence, and take your business to the next level.

There are a number of challenges that come with owning or managing a successful sub contracting business. One of the bigger challenges involves managing slow paying customers, since they can have a negative impact on your business. For example, most of your General Contractors will want to pay you 30 to 50 days after delivering your services or finishing a stage. However, you need to pay employees and suppliers a lot sooner than that. Unless your company has a substantial bank account, you will soon run into problems unless that is managed properly.

One alternative most subcontractors try is to negotiate quicker payments from their GC’s. However, that strategy doesn’t work very often. Another strategy is to try and get a business loan from your local bank. However, most banks will not lend money to a company unless it has substantial assets and can provide financial statements showing two years of profitable operations. This puts business loans out of the reach of most sub contractors. So what alternatives do you have?

If your biggest challenge is that your clients take too long to pay, you should consider construction factoring financing. Construction factoring offers a simple proposition. The factoring company advances you up to 80% for your invoices on delivered and accepted services (or products). This provides you the necessary funds to operate your business. Once the client pays, you get the remaining 20%, less a service fee.

As part of their services, factoring companies will check the commercial credit of your customers. This helps ensure that they only finance invoices that have a high likelihood of being paid. You can leverage this service, which most factors provide for free, to help ensure that you only work with financially responsible companies. Construction factoring companies take your customers commercial credit into as one of the main requirements to qualify. That means that if you deliver quality services and work for good GC’s or builders, your chances of obtaining financing are high.

If factoring is an option you want to pursue, you should keep in mind that the factoring company will need to verify each invoice it finances. This means that they will call your customer to verify that they are happy with the rendered services. Also, be aware that factoring companies cannot factor invoices in which the GC will only pay you, if and when they get paid.

One of the biggest challenges for construction subcontractors is meeting payroll. Paying employees and suppliers is often hard because get paid 30 to 60 days after they submit their invoices.

Whether we like it or not, this is the way things are done in the construction industry. And, unless the subcontractor has a large cash reserve, waiting 60 days can be close to impossible. Especially, with the never-ending payroll responsibilities.

Going to the bank to get a small business loan or line of credit won’t help much. Banks are notorious for not lending money to subcontractors. Furthermore, banks usually require at least 2 years worth of audited financial statements showing a profit, and their loans can take weeks or months to get setup.

There is an alternative. This alternative can eliminate the payment wait and get invoices paid in a little as 2 days. Getting paid quickly allows subcontractors to easily pay employees and suppliers on time, enabling them to grow their businesses. The name of this financing tool is construction factoring, a special type of invoice factoring. Factoring receivables is an easy way to finance and grow your construction business.

Invoice factoring works as follows:

1. You send a bill to the GC or client for a progress segment or completed job
2. The factoring company advances you up to 80% of the submitted invoice. You get immediate use of the money. The remaining 20% is kept as a reserve.
3. Once your client pays the invoice, the 20% reserve is rebated to you, less a small fee

The biggest requirement to qualify for factoring financing is to do business with reputable GC’s or commercial clients and to have a well-run business. Generally, a factoring financing line can be set up in as little as 5 days.

As you can see, construction factoring provides you with a great tool to finance your growing construction business.

Most new and growing resellers and wholesalers have a very common dilemma. Their suppliers insist that they pay for goods up front. However, their own clients insist on getting 30 or 60 day payment terms. Few companies, especially startups, can carry the costs of operating the business for 60 days while waiting to get paid. And, those that can wait that long to get paid usually do so at the expense of future growth. They survive by turning orders away and downshifting their businesses, all while waiting to get paid.

Is bank financing the solution to this dilemma? Hardly. Banks don’t usually lend to startups. And when they do lend money, the process is long and complicated. Furthermore, most banks will require that the business owner present 3 years worth of audited financial statements showing a profit before making a loan.

But what is your business does not qualify for bank financing? There is an alternative called purchase order financing, and it offers a number of benefits that exceeds what most banks can offer. Its benefits include:

1. PO financing is available to startups and growing companies
2. It covers up to 100% of all supplier expenses
3. PO funding grows with you and is based on your sales potential
4. Can be set up in days – rather than months

So, what is purchase order funding? It a financial option that provides you with funds to deliver the goods on your confirmed non-cancelable purchase orders. It provides you with the necessary business financing to pay your suppliers, freight and associated fees. The transaction is settled once your client actually pays for the goods and requires few out of pocket expenses. The collateral for the transaction is your client’s ability to honor the purchase order and pay for the goods.

Factoring companies, which offer po financing, charge for their services based on a number of variables such as the size of the transaction, the complexity and the financial strength of the customer paying for the goods. The charges will be either a percentage of the utilized funds – or in some instances – a percentage of the sales price.

It is also common to use po financing in conjunction with accounts receivable factoring. Factoring is used to finance the invoice that is generated from the po financing transaction and it’s used to close the purchase order financing line. Invoice factoring is usually cheaper than po financing, so using the two together helps reduce the total cost of the transaction.

Having sufficient working capital to operate your business on a is critical if your company is to prosper. Without it, you won’t be able to meet current liabilities such as rent, payroll and supplier payments. When faced with cash flow problems, many owners try to ignore the problem by waiting before taking action. The hope that the problem will solve itself. This seldom happens. While a cash flow problem may be solved temporarily by a quick customer payment, chronic cash flow problems seldom fix themselves and need management action.

One of the more common causes for cash flow problems is offering net 30 or net 60 terms to clients. By offering terms you are effectively delaying your invoice payment. However, usually, you are still liable to pay your suppliers and employees quickly. This creates a gap between when you need to pay liabilities and when you will receive income from an invoice.

Many companies can bridge this gap by using their own fund reserves to cover expenses. Those that don’t have their own reserves usually try to get some form of business financing to cover the gap. Frequently, an owner will approach their local banker hoping to get a business loan. While business loans can be used to correct this problem, they are better suited for buying assets rather than covering cash flow problems. For many companies, a better solution is to use invoice factoring.

Invoice factoring, a form of financing offered by a factoring company, provides an immediate advance on invoices that are payable in 15 to 90 days. This provides the cash flow to cover operating expenses, helping ensure that your company can deliver on its promises. Factoring has a number of advantages. The most important one is that the credit quality of your customers plays an important role in the transaction, and for the most part, determines the amount of funding you can get. This feature makes factoring very dynamic as your financing line can grow as your billings grow.

Factoring companies structure the transaction in two payments. The first payment, about 80% of the invoice, is funded as soon as the invoice is presented to the client. The second payment, about 20% (less the fee), is funded once your client actually pays the invoice.

Factoring is a great solution for companies that have great potential but can’t afford to wait to get paid by the clients.

One of the more common business problems involves dealing with slow paying clients. In most business to business transactions, a product or service is sold to a client who pays in 30 to 45 days. Offering this type trade credit is basically the norm, especially if you are selling to large companies. Basically, larger companies get better use of their cash by making their vendors wait to get paid. It’s that simple.

This agreement works well if the vendor, in this case yourself, has the ability to wait 45 days to get paid. Some can. Many can’t self finance, because they have obligations they have to meet. There is payroll. There are suppliers. There is rent and many other expenses that must be met.

This problem can be solved easily with business financing. However, everyone knows that business credit is tight and very hard to get. Most institutions are making conservative decisions. They need to see assets, solid financial statements and a good track record of running you business. This put business loans out of the reach of most business owners. But a business loan is not the only way to solve this particular problem, nor is it always the best solution.

A better solution may be to factor your invoices. Invoice factoring is a type of transaction whereby a factoring company gives you an advance for your 30 to 60 day invoices. This provides you with the funds to meet payroll and other critical expenses. The transaction is then settled once your client actually pays for the invoice.

One of the advantages of factoring is that it’s easy to obtain, when compared to other products. Factoring companies secure their position by holding the invoice as collateral and they consider this your most important collateral. This an important feature because it provides financing to companies whose biggest – or only – asset is a solid client base. One additional benefit of invoice factoring is that the credit limit is dynamic and tied to your invoices. If you increase your billings to reputable clients your factoring line will usually be increased to match it.

Although invoice factoring is certainly not a cure all, it works very well in instances where the major business challenge is the inability to wait to get paid by clients.

One of the biggest challenges of owning a logistics company is managing all the payments associated with operations. This is true for both freight brokers and truckers. There are driver expenses, fuel expenses, office expenses and repair expenses. What makes managing these expenses difficult is that few clients offer a quick pay alternative. More often than not, they will require that you give them 30 to 60 day payment terms. That is where the problem lies, especially for growing companies.

Basically, you have expenses that must be paid now and income that will come later. There are only two ways to cover this gap. If you have some capital, you can cover the expenses and wait until you get paid. Otherwise, you will need to get business financing.

Most owners think that business loans are the only form of financing for a business. The challenge with a business loan is that they are difficult to obtain. Most banks in Canada are conservative and will only provide a small business loan if the company has a solid track record and substantial assets.

Furthermore, a business loan is usually better if you use it buy capital goods/equipment, rather than to solve short term cash flow problems. One alternative form of business financing that has been gaining traction in Canada is freight factoring.

Freight bill factoring is a financing product that is designed specifically to solve the time gap between delivery of services and payment. It provides a cash advance against the freight bill, providing funds to meet business expenses and tackle new opportunities. One important difference between business loans and factoring is that freight factoring is usually easy to obtain. The most important requirement is that you work with clients who have good commercial credit and pay their invoices – albeit slowly.

Transactions can be structured in a couple of ways. Most companies opt to get two advances. The first one, about 90% of the invoice, is given immediately. The remaining 10%, less a fee, are advanced once the actual invoice is paid by the client. Others opt for a full advance, where they get only a single full advance (usually higher than 90%). However, these transactions have a higher cost.

The costs of financing are determined by the volume of invoices you finance and the credit quality of your clients.

Of all the responsibilities that temporary staffing agency owners have, none is more important than payroll. Employees are the lifeline of the business and making sure they are paid in time goes a long way at ensuring your company has smooth operations. Paying employees on time can be very challenging, especially if a client is late with a payment.

Let’s look at a common scenario for a staffing company. A client leases 10 employees for a short term two week contract. At the end of the two weeks the staffing agency will have to pay the employees. Your client, on the other hand, will get an invoice from you and pay it in 30 to 45 days. Unless you have the funds to pay your employees while waiting for your own payment to arrive – you are going to run into a problem. This situation is unfortunately common in the industry.

The obvious way to solve this problem is with business financing. This is easier said than done. Getting a business loan in Canada can be very difficult. Most banks are very conservative and will only make business loans to clients that can show substantial assets and impeccable financial statements. While these are desirable characteristics, the biggest asset that a staffing agency has is its employees. This makes them hard to finance.

If we look at the problem, it’s fairly simple. It’s the payment gap between delivery of services and payment by the client. One easy way to handle this is to use invoice factoring. Invoice factoring provides a funds advance for the invoice. This gives you the funds to meet your payroll and business expenses without having to wait for your client to pay.

Most transactions are structured with two payments. The first payment varies but it’s usually about 85% to 90% of the invoice. This payment is given to you as soon as you submit the invoice for financing. The remaining 10% to 15%, less a fee, is advanced once your client actually pays for the invoice.

One of the big advantages of factoring is that it’s easy to qualify for. The most important requirement is that your client have solid credit and the ability to pay the invoice on time. This makes it a great alternative for growing staffing agencies.