Small Office Home Office Strategies
A physically fit but financially undercapitalized client of mine once compared the arduous task of securing bank financing to running a marathon: At some point you hit the wall and run out of energy. Unless the funding problem can be resolved expeditiously, the entrepreneur ultimately may lose the race to expand a business and remain competitive.
A bank's credit scoring system automatically will reject credit requests from start-ups, explosive-growth companies or companies emerging from bankruptcy. Rather than accept a cutback in growth or even close the company's doors, there are alternatives.
One lesser-known financing tool is factoring: getting cash for your accounts receivable. Despite this accounts receivable factors long history of acceptance, it often is regarded as being a lender of last resort. But it can be compared to the credit-card industry: A bank that issues credit-card services to a merchant is essentially factoring that merchant's receivables.
In essence, the bank advances funds to the merchant on accounts it has not yet collected. The alternative to a business owner is to wait 30-90 days until the customer pays, meaning many merchants with weekly payrolls simply could not survive. Put simply, accounts-receivable factoring enables a cash-strapped company to turn its most liquid assets, accounts receivable, into immediate cash. Factors generally advance 70 percent to 85 percent of the invoice amount, less their negotiated discount. The balance is paid once the receivable is collected. The cash discount ranges from 1.5 percent to 7 percent of the face value of the receivable, depending on the perceived risk of your customer's creditworthiness, customer diversification, speed of the payment cycle and greed of the particular factor. If your customer base consists of deadbeats, don't expect a factor to come to your rescue. A factor is typically able to fund a new client within three to five days. Once the factor initiates the relationship, subsequent financings can be approved or rejected within 24 hours. This is critical when a large order is generated and smaller suppliers need to be paid quickly to ensure delivery on follow-up orders. Consider these five reasons to use factoring as a financial tool: * Speed up cash flow and avoid problems that slow-paying customers create, such delaying payment of federal payroll withholding taxes. * Finance new companies that may be operating out of the entrepreneur's home and using sub-contractors for manufacturing or service operations. Bankers are extremely skeptical of a new company's survival. * Finance companies where sales are explosively expanding in proportion to the company's minimal net worth. Traditional bank lenders go into cardiac arrest over high leverage - total debt to equity. * Provide an alternative to venture-capital financing involving selling part of the company, often 51 percent ownership, to obtain much-needed cash to keep up with market demand. * Improve on ineffective or nonexistent accounts receivable collections policies and a total lack of credit-approval procedures. The disadvantage of factoring is that it tends to be expensive. It should not be looked at as a permanent financing source but, rather, as transitional. Besides the discount schedule, which is tied in with how quickly the customer pays its invoice, there often is a start-up fee. And there are pricing differences between recourse financing and non recourse financing. Recourse means that if your customer does not pay after the factor has advanced funds; the factor debits your account, often a mandatory reserve account. Non recourse means the factor takes the entire collections risk, equivalent to your borrowing from a bank without a personal guarantee.
Account Receivables
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