Magazine article Business Credit

Factoring May Boost Your Company's Cash Flow

Magazine article Business Credit

Factoring May Boost Your Company's Cash Flow

Article excerpt

Accounts receivable financing has been in existence since the early 1600s, the time of the American colonies. Most people who are aware of this form of financing know it as factoring. Misconceptions abound as to what factoring is and what purpose it serves. Businesses may mistakenly assume that only companies experiencing financial difficulties use this financing method or that its costs are prohibitive.

Traditional Sources of Financing

Four traditional forms of financing have been consistently used in the business world: 1. Inventory Loans These are usually offered

for a six to nine months duration

based on inventory availability. Repayment

is based on installments as inventory

is sold. 2. Accounts Receivable Loans This type of

loan is usually based on a company's

receivables, a track record of its collections,

and its credit history. It is somewhat

similar to actual factoring but less

restrictive. However, due to the economy

and bank-lending practices, this form of

bank financing is practically extinct. 3. Fixed Amount Time Loans A set amount

due in full at the expiration of a preset

time period. While the drawback

is that a lump sum payment

is due at the end of the

loan period, the advantage is

that there are no payments required

until the loan is due. 4. Line of Credit This is the most

prevalent financing tool made

available to businesses. Here a

specific dollar amount is authorized

by the bank. The customer

is allowed to use these

funds as needed. Specific time

periods are agreed upon with

the repayment made via installments

based on the outstanding

balance. The main

advantage is the ability to have

funds readily available and pay

the interest only on the outstanding

loan balance. Due to

strict new loan regulations imposed

by both federal authorities and

lending institutions, this tool is fast disappearing.

Most People Are Oblivious to Factoring

In the consumer domain of factoring, the majority of individuals, and for that matter, those even involved in financial circles, are unaware of the fact that factoring is used more than all other types of financing combined. Every business that offers its customers charge privileges via the use of credit cards, is, in effect, transacting a factoring operation. Those charge slips used by a business for product or services sales are, in fact, credit slips.

In most instances, the business is given cash upon receipt by the issuing credit card bank of these charge slips. This even happens before the customer has paid the bill. If it was any other way, such as the business waiting until the customer had paid the bill, the business would experience serious curtailment of their cash flow. Receiving immediate cash alleviates the business from having all of its working capital tied up in accounts receivables. For the privilege of receiving immediate cash and offering credit terms to its customers, the business is willing to pay a discount. Two to four percent is the typical discount or fee paid. This means that for every $100 invoice submitted by credit card, the business receives $96 to $98 in immediate cash. Commercial accounts receivable financing accomplishes the same for wholesale businesses as consumer account receivable financing does for the consumer.

Additional, some companies, in the hopes of increasing their cash flow, offer a discount for prompt payment. Usually this discount is 2 percent if this bill is paid within 10 days. However, the problem with offering the discount is that the customer may not pay within the 10 day period but still take the discount. …

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