The purpose of this article is to familiarize business owners with a kind of financing that is unfamiliar to many people, Factoring. I will explain, in a simple yet comprehensive way, how to improve your company’s cash flow. You may then decide if using the Factoring approach is a sound business decision for your particular situation and needs.
The Life Blood of Every Business
If we were in a room full of small business owners and asked them all, “What is the one thing your business needs the most in order to survive and grow?” we would probably get a variety of answers: “a needed product or service,” “a solid base of loyal customers,” “a well-prepared business plan to chart your course,” “a good location,” or “effective marketing.” All true answers. But in addition to these, there is one need central to every business – that is the need for available CASH. This is where factoring or accounts receivable financing comes into play.
Cash to business is like fuel to a car. You need to have enough in the tank to start the engine and you need to maintain enough in the tank to keep it running. Now the car (your business) will take you where you want to go. If you run out of gas – cash on hand – at any point along the way, well…we all know what will happen.
Where can a business owner obtain the cash he or she needs? Banks, venture capital, private funds of the owner, friends, and relatives are the most common places in turn. However, banks usually want a minimum of two or three years’ worth of business financials before they’ll give a loan. Venture capitalists want part ownership of the business. Not being in business long enough or not being profitable enough to satisfy the banks; and not wanting to give up any ownership; and with private resources already tapped, the business owner may be stuck. “Where can I find that cash to grow my company? I have a good business with loyal customers, I’m profitable or would be with enough cash to fuel the engine; I just need to get over this hump of not enough cash flow. What can I do?”
The answer to this question may be right under your nose and you don’t even know it. If you have accounts receivable with good, solid customers who are credit-worthy, you have something with intrinsic value that other business owners are interested in buying. The cash that can be obtained for your good receivables can be exactly what you need to get over a cash flow crisis.
By selling something you own – your receivables – you’re not generating any debt that must be paid back; and you’re improving your credit stature because you’re converting assets (invoices) into immediate cash. That cash can enable you to save further by getting volume purchase discounts, discounts for cash, create market opportunities, or hire needed staff. And most of all, you can start new and expanded production without waiting for earlier invoices (sales) to be paid.
Setting accounts receivable at a discount is a means of financing called “factoring” or "accounts receivable financing." It’s been around for centuries and is a billion-dollar industry for large businesses today. And it is growing rapidly in popularity with small and medium sized companies. Factoring not only has saved countless businesses from going under, it has provided many more businesses exactly what they need to grow: cash to fuel the engine.
Further Benefits of Factoring
Selling accounts receivable puts you in control of your business like no other form of financing. You control the discount by specifying when the advance is to be made. You can space the advances to create a steady flow of cash. If you don’t need cash now, you can wait to receive the advance and save on the discount (waiting on an advance creates a line of credit).
What’s more important to realize is no debt is created, you have no loans to pay off, you create and keep a cleaner financial statement, your access to cash grows with your business sales, and there is no need to re-apply. Finally, you can stop factoring at any time. There are no long contracts and you only factor the invoices you want. YOU are in control.
Invoice factoring is filling a tremendous void that banks have created. Companies accelerate their profit and thrive whether you are a start up or established business.
Factoring requires, less paperwork than loans and no credit or reference checks of your business and is also faster than tradition bank loans.
Invoice factoring offers businesses tremendous growth opportunities to assist in the management of cash flow and delivers working capital for your business needs.
If you are seeking an invoice factoring company, then Diversified Financial Services is the smart choice. Our Financial Consultants are ready to answer any factoring questions. You can reach Tom at 800-954-0012.