Factoring Financing Articles

One of the toughest challenges that business owners face is that clients never want to pay their invoices immediately upon receiving the service or the product. Most clients, especially large corporations, demand to be given 30 to 60 days to pay their invoices. Offering trade credit, as providing net 30 day terms for payment is usually called, is very common in commercial transactions. It’s the way business operates. And when done correctly, it can be very safe and give you an advantage over competitors that can’t offer net 30 terms.

But should you offer this to any client just because they ask? No, not without doing a little bit of research about your client.

There are two simple ways to research a client. The first one invoices getting a commercial credit report from either Dun and Bradstreet or from Smart Business Reports. A commercial credit report, which anyone can buy, provides useful information about your clients. It shows liens, judgments and more importantly, it shows how quickly your client pays their invoices. The payment history is the most important piece of information on the credit report. Most reports will also give you a credit score and a credit recommendation. You can buy these reports by going to Dun and Bradstreet’s or Smart Business Reports respective web sites.

However, not ever company has a credit file with Dun and Bradstreet or Smart Business Reports. This is especially true for small and medium sized companies that don’t have a wide exposure. In that case, your best alternative is to ask your client to submit a credit application which includes references. Be sure to check on those references and about their payment experience and average outstanding volumes.

What if your problem is that you cannot wait 30 days to get paid because you need funds to run your business? One alternative is to go to an institution to try and obtain business financing. However, in this economy, getting a business loan is very hard. Another alternative is to factor your invoices. Invoice factoring is a form of financing that give you an advance for your net 30 invoices. It provides the working capital you need, without having to wait for your clients to pay you first.

Author: This article was authored by Marco Terry of Commercial Capital LLC and remains the exclusive property of Marco Terry/Commercial Capital LLC

One of the biggest reasons why small companies can’t get business financing is that they lack the collateral that most financial institutions demand. Even companies in the gas and oil industry, a notoriously good industry, face this challenge. This puts business owners in a very tricky position because they need the financing to grow – but they can’t obtain it. Most business owners think that a business loan (or line of credit) is the only financial solution that will help their companies. This is incorrect. There are a number of alternative products that can be better than business loans for certain situations.

One of these products is factoring, commonly known as invoice factoring. Factoring financing helps companies that sell to other businesses on net 30 terms. In other words, it helps companies that cannot wait 30 (or 60 days) to get paid for their invoices. It provides an immediate source of capital that enables you to cover your company expenses and puts your company in a stronger position to pursue new sales opportunities.

Accounts receivable factoring offers a simple proposition. It provides an advance, usually 80% to 90% depending on the industry, for invoices that are going to be paid in up to 90 days. The remaining 10% to 20% is advanced, less a small fee, once the invoice is actually paid.

Factoring companies consider your invoices from credit worthy clients to be great collateral, which is why they are able to advance funds for them. Qualifying for the services of a factoring company is fairly easy; you need to have good clients and must be free of legal or tax problems.

Another common financing problem that wholesalers/resellers have is getting a purchase order that exceeds their current capital. Most resellers area forced to turn away such orders because they do not have sufficient money to pay their suppliers. This is easily solved with purchase order financing.
Purchase order funding covers your supplier expenses associated with a specific purchase order. It enables you to complete and book large orders – positioning your business in a very strong position for growth.

Although factoring and purchase order financing are not very well known yet, they have been gaining traction in the past few years as a flexible solution for growing companies.

Do you have customer in the Oil and Gas sector? Working with clients in the Oil and Gas industry can be very profitable. However, these clients also tend to pay invoices in 30 to 60 days, which can drain your company’s working capital. Many times, these great but slow paying customers can drag your company’s performance down.

If your working capital is tied in slow paying customers, eventually you’ll have to start turning away new sales. Even worse, you may miss payroll or key supplier payments. Before long your company will be stuck in neutral or about to enter a death spiral. The solution, of course, is to obtain some working capital.

Going to the bank for business financing (e.g. a working capital business loan) is tricky and won’t work for most business owners. Banks usually require 3 years worth of financial statements, detailed business plans and will take months to make a decision. In the end, you may – or may not – get the capital you need. However, if your biggest challenge is that your customers take up to 60 days to pay their invoices, you should consider factoring your receivables.

Factoring receivables enables you get an advance on your slow paying invoices. This provides you with the necessary working capital to make new sales, meet payroll and pay rent. And as opposed to conventional bank financing, invoice factoring is easy to obtain and quick to set up.

Factoring financing is easy to use. It works like this:
1. You deliver your product/service to your customer
2. You submit the invoice to the factoring company for financing
3. The factoring company advances you up to 85% of the invoice as the first payment
4. Once your customer pays for the invoice, the remaining 15% is advanced, less a small service fee

Factoring services fees can range from 1.5% to 3% per month, depending on your business volume and other criteria.

There are a number of advantages to factoring invoices. For starters, it’s relatively easy to qualify for the service. The biggest requirements are that you work with reputable customers and run a good business. And it’s also easy to setup. Usually you can get financing in just a few days. All of these features make receivables factoring a great alternative for new and established companies.