Magazine article Business Credit

Cash Flow: Money to Make Your Factory Grow

Magazine article Business Credit

Cash Flow: Money to Make Your Factory Grow

Article excerpt

In this day of tight loan policies coupled with bank consolidations, I find it amazing how many otherwise sophisticated businessmen and women are completely unaware of factoring as an option for account management. For the company that is experiencing rapid growth, cash flow problems are often a frustrating side effect.

Although your own bank might be happy to lend money for machinery or real estate, when it comes to accounts receivable, the attitude is usually quite restrictive. Banks traditionally discount the value of receivables by at least 50 percent - they prefer collateral that they can see and touch. If it is too large to be easy moved, the banks see it as a benefit. Also, the bank usually feels illequipped to take on the collection activity required in the event that the loan goes bad. There are thousands of small manufacturing companies throughout the United States that, either because of tight finances or a fear of being unable to manage an appropriate collection procedure, currently offer COD terms only. By not offering net-30 day terms, they effectively limit their sales to smaller, and often weaker, outlets. Although dealers might like to take an extra discount for paying cash, most medium to large merchants are unable to do so because of computerization and the need to process the paperwork through their systems. Even those that are willing to pay cash on delivery usually will buy in smaller quantities when they know that they need to pay in a short time.

COD Dilemmas

There is frustration in having a track deliver to a dealer hundreds of miles away: When the delivery comes, there may be no one there to write a check. Then comes the big decision: Leave the goods and hope for payment or take back the merchandise and lose freight costs both ways. There is also a great risk in assuming that a check picked up by your track driver will automatically clear the bank. Some manufacturers submit all orders to a factor for credit approval, even when the terms are COD. If the factor turns down the credit, they ask for cash in advance. If the factor approves the credit, they know that if there isn't a check read on delivery, they can change the terms to net 30 days and submit to the factor for immediate payment. Either way, the factor's commission is usually not much greater than the discount that is given for cash payment.

Relief Is Just a Factor Away

For the company that is suffering from a lack of capital because of a fast-growing account receivable situation, a factor can provide immediate relief. Because the invoice purchased by the factor is presumed to be owed by the account debtor rather than the manufacturer, factors have enabled many small manufacturers to take on large orders from companies, such as Wal-Mart, Target, Sears and Montgomery Ward, because the factors pay them immediately and they do not have to wait the average 45 to 75 days (depending on terms) needed for the invoice to be processed for payment.

It is unfortunate, but in the present banking climate if the local bank doesn't approve your credit, there might not be any advantage to running to the bank in the next community. That bank may be owned by the same banking group. And it is difficult to maintain good banking relationships when owner-ship seems to change annually. Although many factors generally avoid dealing with any company with a negative net worth, many will take into account the honesty and reputation of a prospective client and will look favorably upon small and relatively new companies where the potential for growth exists. …

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