Being in the business of cash, we talk a lot about its impact on our lives and our businesses. The economic recession that we slowly climbed out of has taught business owners many lessons on how to manage cash, but it has also left a lasting legacy that will likely continue even when the economic engine is running at high speed again.
That lasting legacy is one of late payments.
While extended payment terms are becoming more common in the business world, the financial stress they can cause are also piling up. Many companies are caught between customers who want up to three or four months to pay and vendors who want to be paid immediately. It’s a catch-22 that can drive otherwise healthy businesses out of business.
Late payments are typically from large companies. Understandably, businesses dealing with these late payers are afraid to ask for quicker terms because they don’t want to risk losing the business. Being paid late is a better choice than not getting the business at all.
Right? Well, there’s another choice.
Universal Funding offers a way out of this catch-22. By working with us, you get paid right away, your customer gets the payment terms he wants and your vendor gets her payment immediately (which could even lead to early-payer discounts for you).
On top of all that, some factoring companies offer access to business strategy experts, credit-checking capabilities, detailed A/R aging reports and so much more.
This is how it works:
A factor pays you immediately when an invoice is generated. Instead of waiting 60-90 days, you might wait 4-6 hours for the majority of your payment. Then you have the money to pay your vendors, invest in marketing or buy more product. The factor waits for the payment, keeps track of the aging and provides receivables reports and payment records.
When partnering with a factor, you have access to a funding source that grows along with your company and ensures you always have the cash you need. No matter what economy we’re in.
Should Your Business Factor its Invoices?
Business management is full of options from organizational structure to compensation packages, accounting techniques, raising capital and many more.
Invoice factoring is an option available for keeping money in the bank so that your business can continue to move forward. Just like choosing whether to run the company as a sole proprietorship, LLC, or incorporate in Delaware, the decision to factor requires a bit of due diligence.
Not every business is run the same way with the same goals or motivations, so it follows that not every business benefits equally from all options. The balance of pros and cons for factoring is different for every circumstance, but there are certainly a lot of companies who find the benefits of invoice factoring to be vital in their continued growth and success.
Small and upstart businesses often have trouble obtaining capital through traditional bank loans, especially in the current economic climate. Larger companies with lower credit ratings or those seen as “informationally opaque” are labeled high risk and quickly dismissed.
Many of these companies would actually be very successful if they could rely on more consistent cash flows. Invoice factoring is very beneficial for businesses that must wait 30, 60, or 90 days for their customers to pay. These delayed cash flows may be interrupting daily operations like the purchase of materials, paying employees, paying rent or any number of other expenses which limit production or even bring business to a grinding halt.
Simply put, banks won’t lend money to a company that has bills piling up and zero inventory. Factoring is different because instead of evaluating your company’s ability to repay a loan, a factor focuses on the debt already owed to you. Once the invoices have been validated, cash is typically available in 1-2 days and business can go on as usual.
Fact or Myth: Factoring is Expensive
The quick answer: Myth.
The longer answer: It depends on specific situations.
When a company factors its invoices, it doesn’t borrow any money or get a line of credit. In fact, there is no debt at all. Instead, accounts receivable are used as a sort of collateral for instant cash flow.
The factor, or the company providing the financing, buys accounts receivable and takes on the responsibilities associated with collecting on those unpaid invoices. Because of this, a business won’t get the full invoice amount; but will generally get up to 99 percent of the face value.
Some benefits of factoring include:
- Instant and reliable cash flow for a business that can be used without limitation.
- The ability to pay vendors early and establish better relationships and take advantage of potential discounts.
- The ability to buy supplies and equipment and always keep up with demand.
All that comes at a cost generally between 1 or 2 percent of each invoice. Considering that cost could potentially pay for itself with vendor discounts, factoring is actually an economical way to finance a growing business.
An Extra Benefit of Invoice Factoring
In addition to the obvious benefits of fast, reliable cash, more profits and reduced expenses that invoice factoring creates, there’s another important benefit that factoring offers: Credit screening of your customers. Perhaps the most important component of a factoring transaction is the credit quality of your invoices. This is critical because your factoring company uses those invoices as security for the transaction. Because of this, your customers should have good commercial credit scores.
Most businesses, though, never bother to check their customer’s credit. When you work with Universal Funding, we do it for you. That’s a major benefit to you because it allows you to leverage the credit worthiness of your customers to your advantage. If the credit check on a potential new customer comes back as high-risk, you have the opportunity to not accept the new business, or modify the terms, and minimize the risk of losing money on them. On the other hand, a commercial credit check could show a long history of paying on time and in full, which obviously would be welcome news.
Even better, these credit checks are an included part of your factoring agreement when you factor with Universal Funding. Most of us have years of experience in reading and interpreting these credit reports and do so on a daily basis. That makes working with Universal Funding like having your own credit-analysis department!
Our ultimate goal is to see your business grow. That’s why we offer some of the lowest rates in the industry, gladly help resolve tax issues, provide credit reports on your potential customers and work our tails off to make sure you get funds when you need them. Whether your company is facing new challenges or new opportunities, we are here to help.
A Profitable Business that Nearly Closed, and How it Was Saved
“I had to make a choice: close my business or not.”
This quote comes from a business owner who makes money, employs people and has a steady client base. In fact, the business just secured a contract with a large company that will help the business hire more people and grow. So why would the business owner wrestle with the idea of shutting down?
Because there was a big problem.
The large company pays its invoices on the 15th of every month but the small business must pay its employees on the first and 15th each month. That means the small business will need to pay its employees before it receives payment from the large company. This small business doesn’t have the cash available to buy all of the necessary supplies for the new client and pay its employees on time.
What options does the business have? Delay paying the employees? Apply for short-term credit with a bank? Let its new client go? Close up shop all together Paying employees late isn’t a real option. They’ll take it as a sign of trouble and bolt at the first opportunity. Seeking credit from a traditional bank would never be finished in time because of the rigorous approval process. Closing a profitable business would be an absolute shame, but if the money’s not there, closing remains an option.
But there’s a solution. Solving this business’ cash flow problem is as easy as accounts receivable financing. This type of financing would allow the business to access the cash tied up in its receivables, purchase supplies, pay vendors, meet payroll and stay in business. That’s the business of factoring: helping companies grow and succeed.
Even profitable companies experience cash flow problems; it’s a part of doing business. It’s important to know that if your business is experiencing difficulty meeting payroll, paying vendors or buying necessary supplies to fill orders, there are solutions available to you. Even if cash flow isn’t a problem today, it could be tomorrow. When the problem arises, know that Universal Funding has your back and will get you through it.
If factoring sounds good so far, contact us today, and we’ll look at your specific situation and help you determine the best course of action for your financial needs.