Improving Cash Flow with Invoice Factoring and Purchase Order Financing

Managing cash flow can be a challenge for many businesses. But creative funding options like invoice factoring and purchase order (PO) financing can make the job much easier.

These financial solutions offer convenient, cost-effective and immediate access to working capital. Invoice factoring and purchase order financing are suitable for companies in just about any industry. They can provide financial support to expand, manage business surges or even meet day-to-day operating expenses. And they’re ideal if your company is newer and can’t obtain a loan.

The Ins and Outs of Invoice Factoring

Invoice factoring is easy to set up and terminate. To qualify, you should have no existing primary liens or claims on your accounts receivable. And you must have creditworthy clients who pay their invoices promptly and in full.

When factoring customer invoices, you can receive quick cash advances often within 24 hours. Your cash advance is based on the overall value of the invoices you provide as collateral. Typically, you can get 80 percent of the invoice value upfront and the remaining value after your client pays the invoice minus a three to five percent factoring fee.

Your customers pay the factoring company directly. And the factoring company takes responsibility including any loss for the collection of their debts. It’s important to note that invoice factoring is not a loan, so there are no repayments to make. You are simply using the good credit of your clients to release your own assets to be put back in your own business.

Historically speaking, factoring is a well-established form of business financing that produces cash payments at the time of shipping, delivery and invoicing. Its origin has been traced to the days of the Roman Empire or even earlier, but the U.S. factoring industry dates back only about 200 years to the early nineteenth century. Factoring companies, known as factors, evolved from U.S. selling agents for European textile mills. Currently, about 70 percent of the volume of traditional factors is still in textiles, apparel and related industries that highly value credit guarantees, according to the Commercial Finance Association.

Invoice factoring can provide the working capital your business needs to handle new projects, fill large orders and pay creditors on time or even early. In essence, factoring can keep your cash flow running smoothly while your business grows. This can enable you to stop worrying about finances, and concentrate on productivity and how to profitably expand your business. Factoring also can help you avoid wasting time tracking down accounts receivable or handling bad debts.

Here are some other important factors (no pun intended) about invoice factoring:
– There is no application or set up fee.

– You choose which accounts to finance.

– Invoices eligible up to 30 days from the date of invoice.

– There is no a minimum funding requirement or requirement to factor all invoices.

– The funds wired directly into your bank account.

– Customers send their checks directly to our lockbox.

Cashing in on Purchase Order Financing

PO financing can provide quick cash flow reserves for manufacturers, importers, exporters and distributors. This type of short-term funding is used to finance the purchase or manufacture of specific goods that have been presold by the client to its credit worthy end customer. Funding involves issuing letters of credit or providing funds that allow companies to secure the inventory they need to fulfill customer orders.

With PO financing, working capital financing is protected by a security interest in existing purchase orders and the proceeds of the purchase orders. Normally, the security interest is perfected by the lender taking possession of the inventory or raw materials.

PO financing can pay for the cost of your goods directly to your supplier, freeing up cash for other critical business expenses. This can help your company ensure timely deliveries to customers, grow without increased bank debt or selling equity, and increase market share. To qualify for PO Financing, you must provide financial information about your company, information about your buyer and supplier, and buyer and supplier invoices.

PO financing is available for finished and non-finished goods, although finished goods are generally easier to finance. Finished goods involve transactions where the goods go directly from your supplier to your buyer. You never touch them or take direct possession.

Non-Finished Goods are when you, the seller, take possession of the goods either in a raw state (such as yarn to make blue jeans) or a semi-finished state (partially sewn blue jeans). In either case, you must take possession of the product.

Purchase order financing can help solve a variety of cash flow dilemmas. Here’s a prime example: Your suppliers want you to pay cash on deliver (C.O.D.) and your buyers want to pay you net 30 to 60 days. You have no cash flow during manufacturing, while the goods are in transit, and until your invoices are paid.

PO financing may be right for your company if…

– You need additional working capital.

– You lack expertise to handle the financing.

– You need a quick response to an immediate sales need.

– You don’t want to incur additional credit risk, be it foreign or domestic.

– You want your buyers and sellers to not know each other.

– You want the opportunity to make additional profit.

Purchase orders can be used for U.S. and foreign buyers and suppliers. Consider this scenario involving a U.S. supplier and U.S. buyer: You’re an apparel manufacturer. You’ve been in business for six years and have a good profit and loss statement and balance sheet. You just received a large order and are maxed out on credit from your suppliers. Your sales price to your buyer is $100,000 and your total cost to produce the goods is $75,000. Your gross margin is 25 percent. The financing company will purchase the goods for you from your supplier, give you 45 days to produce the goods, charge you a 5-percent purchase order fee ($5000, 5 percent of $100,000) and factor your receivables.

Invoice Factoring- The Best Solution

If you are involved in business, then you know the importance of cash flow. Cash flow is the biggest business necessity, and when it runs short, there is a serious problem. This is where invoice factoring can help. Invoice factoring is a cash flow tool used by a variety of businesses because of its ancillary services. It provides easy and ready cash necessary for a business to run smoothly.

Invoice factoring is the easiest way to get cash in the event of a financial emergency. All a business has to do is sell its invoices for cash. An invoice factoring company will pay you cash for your open invoices- by far the best option available to you if you should find yourself in an emergency. It is wise to be prepared for these kinds of situations, but it is not always possible- and invoice factoring can help you out.

When pressed for cash, most businesses first impulse is to apply for a loan from a bank. This is not a wise step, as the majority of banks have been stockpiling their loan loss reserves over the last several years; invoice factoring is infinitely more practical. A little-known fact is that this easy financial option has been used for centuries.

Invoice factoring is a smooth cash flow tool used by a variety of businesses, both upcoming and established. The benefits of invoice factoring are as follows:
Invoice factoring easily eliminates bad debt. This non-recourse factor simply presumes the risk of bad debt and eliminates this expense from the business’ income statement.
The majority of the work associated with processing invoices, such depositing checks, posting invoices, entering payments and producing regular computer reports is handled by the factor.
An unlimited source of capital, invoice factoring is the only source of financing that increases with your sales.
You need not lose money by offering early payment discounts and volume discounts.

If you are in need of urgent cash, invoice factoring is the best solution. For more information on invoice factoring, factoring invoices and invoice factoring rates please visit.

Invoice Factoring: Cash Now, No Waiting, No Debt – Your Competitor Is Doing It, Are You?

What are Your costs for NOT Factoring?

Consider the time value of money and the benefits of improved cash flow to your business. By having, cash for your invoices within 24 hours are you able to pay your suppliers faster and receive better discounts. Are you able to fulfill your next order to XYZ Company and make payroll without tapping your line of credit at the bank? Can you offer longer terms to larger customers and attract more business? Can improved cash flow help your business grow or survive without incurring more debt at the bank? Can the financial benefits of improved cash flow to your business offset the fees of Factoring, and then some? Sure it can, the savings alone in taking discounts from your vendors can equal the cost of Factoring. All the other savings are in your pocket! Factoring is a smart business decision. Why are you doing it?

Is Cash needed immediately for growth or survival?

Is long billing cycles putting a strain on your business cash flow? Despite increasing sales, does the management of receivables and payables seem like a juggling act? Could your business increase sales by offering better terms to your new and larger customers? Are you spending too much time collecting from slow paying customers and not enough time building your business? Is your bank turning you down for traditional financing due to years in business, profitability, lack of assets, personal guarantees or financial strength?

Have you considered turning away new business due to slow cash flow?

These are challenges many businesses face that can be solved with Factoring.

Benefits of Factoring Receivables

Simplicity

The advanced funding you receive for your receivables and the discount fees you will pay are based solely on the financial strength and credit worthiness of your customers, not your business!

You receive Cash for your unpaid accounts receivable invoices. Usually the factoring company buys the invoice from you for an amount less than its actual face value (70-90%). When the Factor later collects the full amount of the invoice from your client, you will receive the remainder of the advance less the factoring fee (discount rate). Fees will vary depending on the total dollar amount you intend to factor on a monthly basis.

Flexibility

Need a flexible financial solution that can help your business be more competitive while improving your cash flow, credit rating, and supplier discounts? Factor as much as your want or as little as you want. You decide. No obligations. There are No minimums and No maximums in the amount you can factor. No binding contracts, if that is what you want.

Unlike traditional bank financing, factoring relies on the financial strength and credit worthiness of your customers, not you. Here’s why you should use Factoring services:

Offer Better Terms – Win More Business

With Factoring, you can attract more business by offering better terms on your invoices. Most companies negotiate on price to win business in a competitive market, but with Factoring, you can negotiate with terms instead of price.

To your customers, better terms can be more attractive than better prices.

When using attractive terms to win business, you can build the cost of factoring into your costs of good and services.

Example: A new customer may choose to do business with your company because you can offer NET 30 or NET 45 terms while your competitor (who isn’t factoring) requires payment up front but has a 3% better price. If you factor the subsequent invoice at a discount of 3%, you have leveraged factoring services to win the business at no extra cost and improved your cash flow at the same time.

Improve Cash Flow * NO Additional Debt *WIN over customers

Your Business Receives:

* Get cash in 24 hours or less from your outstanding invoices! Eliminate long billing cycles.

*No new debt is created. Factoring is not a loan. This allows you to preserve your financial leverage to take on new debt. Improved credit rating.

*Purchase capital equipment to expand your business.

* Increase inventory for quicker shipments or handle seasonal inventory needs.

* Market for additional business.

* Take trade discounts. This alone can offset Factoring fees and all the other savings are gravy!

* Pay off nagging, expensive delinquent obligations.

* End payroll worries.

* Meet tax requirements on time. No more exhaustive penalty fees.

* Negotiate discount purchasing.

* Unlimited sales and profit potential.

You Receive:

*Cash stability

*Simple to start and use

*You keep control

* Reduce stress, improve planning, focus on what is critical to make money.

Customer Credit Services:

*Reduce bad debt expense, work with experts at collecting.

* Streamline credit approvals for new customers.

* Improve decision-making on new business.

* Reduce administration costs: long distance calls for collection and credit investigation, postage, staff, monthly statements and more.

* Larger customer credit lines and better terms, which increase sales.

* As you grow, your payroll budget for credit and collection department is minimal.

Accounts Receivable Management:

* Reduce administrative costs. Factor will post invoices and apply cash applications.

* Improve customer relationships. You are no longer the bad guy looking for payment.

* Improve receivable turns. Fact: Customers pay Factors before independent businesses.

* Improve accounting performance; timely reports, online access and more.

* Redirect your critical resources to marketing and production

If you are looking to receive an increase in cash flow and increase your bottom line profits, you need to factor your invoices now!

Please feel free to reprint this article as long as the resource box is left intact and all links are hyperlinked.

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What is Invoice Factoring and Invoice Discounting?

The Romans were the first civilization to sell promissory notes at a discount, beginning the industry of factoring. America was built largely on the possibilities of factoring, when colonial businesses were factored by Europeans willing to invest cash in exchange for the promise of large returns, and government bonds also use the same principles applied by businesses when they engage in invoice factoring.

Invoice factoring is, at its simplest, the sale of the right to collect cash owed on your outstanding invoices. Most businesses engage in invoice factoring when they need cash up front quickly, or when they have customers that are slow to pay and don’t have the resources to build an accounts collections department. Though some companies are large and established enough to get accounts receivable financing through a regular bank, it can be handy to have access to invoice factoring companies as well.

Most businesses use invoice factoring to get fast cash. In the intense and fast paced business environment of today, ready cash can be invaluable. With the sale of your invoice futures, you can get the cash today you need to capture customers that will move your business forward.

Invoice factoring is not a loan; rather, it’s an outright sale of an asset. Another way of looking at it is as a cash advance: you give up a certain portion of the money you expect to receive in the future in exchange for ready cash today. While some businesses purchase invoices outright, others give you a down payment toward the invoice, paying you the balance less their fee when they receive payment from the customer. One of the best things about invoice factoring is that your credit has no bearing on whether you are approved; instead, your customer’s credit qualifies the invoice for factoring.

Many different industries take advantage of invoice factoring, including:

  • Transportation
  • Manufacturers
  • Distributors
  • Wholesalers
  • Staffing and consulting firms
  • Telecommunications companies
  • Service providersBecause ready cash is so important in their business, industries that are heavily vested in human services and need to be able to meet payroll are among the best able to leverage invoice factoring. However, any business that generates at least ten thousand dollars in accounts receivable should be able to use invoice factoring, provided they’ve acquired creditworthy customers.

    Other situations that might make invoice factoring a wise choice for you include:

  • A young company with creditworthy customers, but not sufficient credit history for your own business to be considered creditworthy by banks
  • A company with the necessity of taking advantage of new, time-limited sales and profit opportunities, but inadequate cash flow currently to do so
  • Companies with income, credit, or tax problems
  • Companies that have filed for bankruptcy, but that stand to turn a profit
  • Companies that are growing too rapidly for ready capital to keep up with business needs
  • Companies poised to grow very soon but do not want to incur debt
  • Companies that are growing rapidly, but do not have good enough credit to take out bank loans.
  • Start-up companies with no capital base currently
  • Companies with seasonal sales patterns or uneven sales patterns

Receivables Factoring: An Easy Way to Free Up Cash from Unpaid Invoices

If your business is facing cash flow challenges, account receivables factoring may be the ideal solution to the problem. With receivables factoring, you sell your accounts receivable or invoices to generate quick cash. Receivables factoring is a common practice that’s been used for centuries by businesses around the world to manage cash flow. In fact, receivables factoring transactions in the United States, alone, exceed $60 billion per year, according to the Commercial Finance Association.

Benefits of Receivables Factoring

There are a number of benefits to receivables factoring. A major reason is that it gives you the ability to immediately access cash owed to your company. For some businesses, this minimizes the need to incur debt for operations while waiting for invoices to be paid.

Another advantage of factoring is that it provides a smoother, more consistent cash flow. Instead of wondering if or when you will receive payment from your customers, you can accurately predict when you’ll receive payment based on the terms of your relationship with the receivables factoring company. Businesses typically must wait 30, 60, or even 90 days to receive payment on invoices for products or services that have been delivered. During this time, these funds are tied up and inaccessible to the business. However, receivables factoring can eliminate long billing cycles and enhance cash flow.

Also, factoring eliminates the need for you to handle your own collections. Factoring companies are run by professionals who specialize in collecting and tracking invoices. This translates into an overall reduction in the amount of bad debts and fewer headaches for your business.

Receivables factoring can give you access to cash within 24 hours, which can help you effectively meet short-term cash flow crunches. It also can help you:

o Accelerate cash flow, making it easier to make payroll, pay taxes and fulfill new orders.

o Offer better terms to large customers and increase sales.

o Extend credit to large customers without asking for COD.

o Pay your suppliers faster; take advantage of early pay discounts.

o Purchase equipment, inventory and supplies.

Qualification for Receivables Factoring

Just about every type of industry that generates commercial invoices can and does use receivables factoring. In general, if you pay for labor or materials prior to receiving payment from your customers, factoring can help your business. Or if your business is growing faster than you can generate additional working capital–from private sources or from a bank–factoring can probably provide the cash you need for steady growth. Also, if you have a fairly new business that can’t qualify for bank financing, factoring may be ideal for you.

To qualify for receivables factoring, your company will have to meet to two basic conditions. There can be no existing primary liens on your invoices, meaning no other company should have a claim on the payments when they come in. Also, your customers must also be creditworthy. The factoring company will evaluate your customers on the basis of how quickly they’re likely to pay their invoices.

Prime Candidates for Receivables Factoring

Is your business a prime candidate for receivables factoring? Receivables factoring may be the perfect solution if:

o Long billing cycles are putting a strain on your business cash flow.

o You’re spending too much time collecting from slow paying customers and not enough time building your business?

o The bank has denied your request for a traditional loan because of your lack of years in business, profitability, assets or overall financial strength.

o Your business could increase sales by offering better terms to your new and larger customers.

On the other hand, receivables factoring may not be a good fit if your business is running on low margins–less than 10 percent. Receivables factoring also won’t make sense for your business if you have ample working capital and cash flow isn’t a problem.

How It Works

With receivables factoring, you essentially liquidate or sell outstanding invoices to a factoring company to receive immediate working capital. The company buys the invoice from you for a cash advance amount slightly less than face value, and then later collects the full amount when the receivable is due. Once the factoring company receives full payment for the invoice, you’ll receive the remaining amount–minus a fee. Generally, the receivables factoring fee amounts to three to five percent of the invoice value.

Factoring companies have different fee structures, but factoring fees typically involve:

o Advanced funding – When you send in an invoice to be factored, you’ll usually receive 70 to 90 percent funding of the invoice amount within 24 hours after the invoice has been verified. Then the advanced funding is wired to your business bank account.

o Discount rate or factoring fee – The factoring fee can range between 2.5 percent and 3.5 percent per 30 days, or .1 percent for every day the invoice is unpaid after factoring. (Factoring fees can be customized to the individual needs of your business and customer base.)

o Remainder of the advance minus the factoring fee – When your customer pays the invoice, you will receive the remainder of the advanced funding, minus the factoring fee or discount rate.

Here’s an example of how receivables factoring works. Suppose you have a customer XYZ Company, which owes your business $100,000 for a shipment of your gadgets that were just delivered. XYZ Company is a large customer that has good credit, but they never pay their suppliers (you) any sooner than 45 days. Instead of waiting 45 days to receive payment for your $100,000, you decide to take advantage of receivables factoring. The factoring company verifies your invoice to XYZ Company and you receive 80 percent of the $100,000 ($80,000) within 24 hours, wired to your bank account.

If you have a discount rate similar to the one previously given and XYZ Company pays the $100,000 invoice in about 45 days, this equals a factoring fee of 4.5 percent of the original $100,000 ($4,500). Since you have already received an advance of $80,000 from the factor, you’ll receive the remaining $20,000 minus the factoring fee of $4,500 ($15,500). Ultimately, you’ll collect $95,500 of the original $100,000 invoice.

Keep in mind that the percentage charged by a receivables factoring company is generally more than you would pay for a short-term commercial loan. For that reason, factoring is best used to generate quick cash–not as a long-term solution. Also, receivables factoring companies make their money based on the volume of invoices they purchase. So you may have a slightly harder time finding a factoring company if you have invoices less than $10,000.

Small Business Factoring – Remedy For Cash Flow Problems

When starting out as a business owner, no doubt you considered all the aspects of owning and operating a business. One neglected area of business ownership is cash flow. Neglected that is until the business owner realizes outstanding billed invoices are not being paid in a timely manner and ongoing operations can’t be funded since the necessary cash flow is not coming in as expected. What is the solution for a new business or one that does not have enough established credit to get a line of credit from the bank?

Small business factoring is one solution that offers quick access to cash collateralized by your own accounts receivable or outstanding invoices. First. let’s consider the situation and how cash flow problems came about in the first place. Generally, invoices are sent to customers with Net 30 terms, meaning the balance of the invoice should be paid by the customer within 30 calendar days. As many business owners know, seldom do their customers pay within a 30 day time frame with many going unpaid for sixty days or more. Odds are, your customer is experiencing the same cash flow problems as you, their vendor.

So how can small business factoring be a solution for cash flow problems which plague small and mid-size business? Invoice factoring can provide much needed cash within days rather than weeks for your business. This type of business funding is simple in methodology. For example, once a business supplies goods or a service to a customer and an invoice is generated for the total amount due, rather than sending the invoice to the customer, the invoice is sent to a factoring company.

The factoring company will take the invoice and evaluate the financial worthiness of your customer and if they meet the factoring company’s guidelines, they will send you, the business owner, a check for about eighty percent of the total value of the invoice. The other twenty percent of the outstanding invoice is held in reserve until the invoice is paid in full. Once the invoice is paid, the factoring company will send you another check for the remaining twenty percent less their fee.

The small business owner receives needed cash to operate his business within a few days allowing him to continue operating unencumbered by cash flow shortfalls. The factoring company assumes the risk of collecting the outstanding invoice and collects a fee from the total amount of the invoice. Small business factoring is an excellent solution for cash flow problems affecting your bottom line.

Invoice Factoring: A Tool To Revitalize Your Business

imagine a situation where your company is unable to strike a good deal owing to late payment to be made by its customers. You find yourself to be really missing out on “that big deal.” But now, you don’t really need to face the guilt of missing out such an opportunity. Thanks to the boom of factoring into the financial field! All that you need to do is approach a suitable factor and see yourself getting out of every dilemma.

Compared to loans and lines of credit, which require the clients to have tangible assets and strong financials, invoice factoring [http://1rstfunds.com/Small-Business-Cash-Advance.php] helps one to attain cash easily. Besides, most of the business enterprises today do not qualify for the criterion set by the traditional lending institutions. As such, invoice factoring offers them an excellent opportunity to gear up their business. Factoring allows them to avail immediate capital only at a nominal cost.

Invoice factoring is a blessing for business enterprises that are preparing to grow significantly because the factor takes up a part of the client’s credit risk for the end customers. It involves the factor’s bearing up of the loss in case the debtor fails to pay the invoice. This, therefore, is one of the critical services lent by factors to ambitious business enterprises.

One essential thing to know about factoring is that one doesn’t need to owe anything to the factor. The factor does not advance loans but buys invoices from the client. Since invoice factoring is not a loan, it is easy to qualify for it. All you need is a well-run business along with good customers. These are the only two potential prerequisites needed to avail the benefit of factoring. Many factors, infact, do not even demand high credibility on part of the customers. This makes factoring even more alluring to small business enterprises.

Besides, one of the primary objectives of any enterprise is steady cash flow. If cash flow freezes all of a sudden, there arises an immediate need to convert the receivables into ready cash. Invoice factoring thus offers the unique prospect to regenerate a dying business as it provides certain ancillary services as well as frees up internal resources.

Trans Finance: A Look Into Invoice Financing

In business, the ability to manage cash is something that is mandatory if the business is to be successful. Invoice financing is a term that is used to describe the managing of cash in business. It is very important for a business which is small but has the intention of adding capital so that large business can be grown from it. It is a practical way of being financially free so that the finance that you will need for your cash flow will always be flowing. Invoice financing is something that covers different types of financial options. All of these are integrated in a way that is meant for the growth of the business.

Invoice financing covers three main areas but all have the same goal of setting the growing business free to financial freedom. Factoring of the invoice is one of the areas that are meant to help the company in the management of the business. It covers credit control, sales area as well as the ledger. The factoring part of the finance invoicing is meant to take stock of the credit while at the same time pursue those are debtors so that the cash flow will be smooth. This is one of the areas that a lot of small business neglect while they should really give it importance as it is what will lead to a better management of the resources. Invoice financing therefore comes up with ways that will help the business be in control of their credit.

Invoice Discounting is another area of invoice financing that is almost similar to factoring in that its main aim is to get the business in control of its credit. It will therefore ensure that invoice is well balanced and cleared in good time. It is one of the things that is used to restore confidence to customers on the ability of being trusted with their invoice as well as being in control of the business credits. Most of the large grown business applies this knowledge on the management of their finance and they even have departments that are meant to look into the credit control system.

Asset based lending is another area that is key in invoice financing. The ability to tally and balance the assets is very key in the management of business assets. Lending is one of the ways that is used in business to gain more funds. However, lending cannot be achieved if the assets of that the company is not even sufficient for it to run alone. Assets based lending looks into ways that the assets of the company can be increased so that enough cash can be available for the invoices that are outstanding. They look into ways of increasing property for the company, some equipment as well as the company stock or shares. They therefore come up with ways that can be used in the raising of cash.

Invoice financing is something that has been seen to work. It has not only led to the growth of businesses but also it has birthed new business opportunities. It will reduce the chance and probability of borrowing from financial institutions because of inability of funds.

Things to Consider Before You Turn to SME Invoice Factoring

Invoice factoring sounds like the perfect solution to a small business. Be careful though, my recent experience shows that, in some situations, this may actually be quite detrimental to the cash flow management of your business.

Firstly though, are we all clear on what is invoice factoring?

Invoice factoring takes over all the tasks involved with the running and maintaining of your sales ledger. This covers the tasks of raising your invoices to customers, payment collection and credit control. Furthermore, the factoring company will advance you upto 95% of the value of the invoices raised.

Sounds perfect?

Unfortunately if the factoring company starts to find that your customers are not paying within a set amount of time or they don’t “like” the customers you are dealing with, then they may start to cap your factoring advances. When your funds start to get capped and with no alternative arrangement in place, your cash flow will be instantly stopped and you could find yourself in a very difficult and stressful place.

So, think about your business now and try to manage this situation before the situation starts to manage you!

Here are 3 areas you should think about and how they apply to your small business accounting.

1. You lack visibility of your sales ledger process so will be dependent on Invoice factoring

The problem: Managing your customer invoicing and cash income may seem like an onerous and non priority task to you, especially if you want to be able to focus on growth. Invoice factoring can be a great solution, especially where your costs are heavily incurred upfront, e.g temporary staffing agencies. However, with handing over this processing task to a third party you will loose line of sight and visibility on who are the bad payers, how long is your cash collection cycle and what is the true requirement for working capital for your business. In the early days of your business, this may not be your concern, however as your turnover increases, factoring charges based on your gross turnover will increase proportionately. 4% of £100K may be affordable, 4% of £2m feels expensive.

To manage this situation: Think how long and at what level of turnover the factoring costs, in real terms, will become uncompetitive. Ensure you plan in advance an alternative financing strategy. Look at the terms of your agreement to ensure you will have the option to switch when the time is right and don’t tie yourself in for too great lengths of time on the promise of a lower factoring % today.

2. Slow responsiveness to queries and credit note requests.

The problem: Is it likely that customers will dispute or query invoices due to the nature of your business? Where a large factoring service is used, this will be remote to your offices. Any customers ringing up with queries are likely to be dealt with, in a less personal way than if this function were carried out in house. Customers with queries on invoices often find they don’t get a quick level of response for copy invoices or even agreed credit notes. This all results in payments being held back. Once again, this is going to impact on your advance if your agreement is that you are advanced up to a capped amount based on the age and balance on your sales ledger.

To manage this situation: Check the responsiveness of the factoring company by ringing them yourself. Do you feel happy that your point of contact is responsive to your queries as their customer? Is there cover when your point of contact is not about? If they are not responsive to you, you can bet your customers are getting an even worst service. Check also on the ledger notes and with your contact periodically. What types of queries and requests are being raised by your customers? This can give you an indication of where the process is failing. E.g are customers constantly asking for copies of invoices, could this indicate that invoice are not being sent out in time if at all. Check where you have requested a credit note, how long is it taking to get this credit note raised and you seeing it on the system. What is the principle way invoices and supporting documents are being sent to your customers, post or email and how long is this taking.

3. You have new customers who do not have sufficient trading history.

The problem: Factoring companies really do not like new companies in terms of granting advances on their invoices. With no trading history, they may simply decide not to factor these invoices but will happily take on the invoicing and credit control of these customers. This will all be wrapped up in your fee, so ensure that you understand the factoring company’s criteria for factoring a company for you. If you are paying for credit control, satisfy yourself that the factoring company is chasing your unfactored invoices as vigorously as your factored invoices.

To manage this situation: If there are going to be a number of your customers who are likely to not be factored, then it may be worthwhile you taking on your own credit control of your customers. In terms of the management of your cash, these customers will be critical and will probably need much closer watching until you are satisfied they will pay to terms and will not make an unnecessarily pull on your cash reserves.

Otherwise, check the processing time it takes for your Factoring company to raise, send out and collect payment from your unfactored invoices. Check the lead time your invoice factoring company believes it can work to. Now check with the customer on how quickly they are receiving the invoice. With some of the larger factoring businesses, they do not know themselves so don’t always rely on what they are telling you, carry out your own checks.

Cash Flow Management – Time to Take Control!

Cash flow management is one of the most important and most ignored financial tools available to business owners and managers. Cash flow management is not accounting! Many business owners fail to recognize that the rules of accounting define when and how transactions are recorded in their financial statements, which is no help when they need to manage their cash for next week and next month.

True cash flow management must be based on a cash flow projection, a tool which forecasts the actual date that deposits (revenue) will be made and when, in the future, expenses will be paid. How important is cash flow? Keep in mind that businesses fail every day because they run out of cash, even though their income statement showed the business to be operating profitably.

What to do when you find yourself in a cash crunch? First, understand the factors that drive cash flow and how you can take control. The following factors have the greatest impact on cash flow:

  • Accounts Receivable (time between generating the invoice and depositing the cash)
  • Accounts Payable (time between receiving the invoice for purchases made and your payment of that invoice clearing the bank)
  • Inventory (time between paying for the materials and depositing the income from the sale of the finished product)
  • Capital expenditures (cash out to make the purchase vs. recording depreciation expense over the useful life)

Later in this report, we’ll focus on cash flow projection tools and techniques. Let’s start with some quick fixes that can get you some relief from a cash crunch.

1. Get the Money!

    a. Issue invoices quickly – Don’t wait until the end of the week or month to generate and mail invoicesb. Ask your best customers to accelerate their paymentsc. Offer rewards to customers for quick paymentd. Offer electronic fund transfers as a method of payment to eliminate “it’s in the mail” timee. Include promotional flyers with invoices – Offer perks for quick payments or to promote the launch of your new product or servicef. Require COD on future sales for slow pay customersg. Aggressively pursue unpaid invoices, i.e. one day past the due date

    • Call the customer weekly – Take detailed notes of each call and conversation
    • Involve the owner of the company – Don’t stop at the AP clerk, call the owner directly
    • Create a written collections policy and follow it, don’t be a “softy” – Define hard timeframes for action. For instance, an invoice that is due in 30 days; at 31 days, call the customer: at 45 days, offer a payment plan: at 75 days, turn over to a collections agency: etc…
    • Take legal action sooner rather than later – The longer you wait, the further down the list of creditors you may be
  • b. Restructure your invoices to define a specific date the payment is due. Your invoice should encourage action, not inaction, i.e. “Payment due June 2” is better than “Payment Due in 30 days”.

2. Hold on to your cash as long as you can!

    • a. Prioritize the payment of invoices – All invoices are NOT created equal!

      • Pay the most important invoices first
      • Minimize late fees, finance charges and penalties – Pay invoices with the highest penalties first
    • b. Communicate with your lenders sooner rather than later – Your cash issues will get worse before they get better!

      • Negotiate interest-only payments on loans for the next 6 months, without penalties
      • Never promise anything you cannot deliver, especially with your banker – if you can only pay $300 per month, do NOT agree to pay $500 per month
    • c. Contact suppliers and negotiate extended payment terms,

without

    • penaltiesd. Search for new suppliers that offer longer payment terms
    • Longer payment terms can be much more valuable than a lower price
  • e. Consolidate loans, where possible

3. Convert Assets into CASH!There are many ways to create cash from the assets of your business, some better than others. The following is a list of options for converting assets into cash:

    a. Sell off out-of-date inventory, unused equipment; anything else you have around that’s not making money

    • Pawn shops, Craig’s List, EBay, and inventory liquidation firms are just a few of the options available
  • b. Consider selling your accounts receivables to a Factoring company

    • Factoring companies will buy your accounts receivables, at a discount – You get the cash quickly, they assume the hassle of collecting from the customers
  • c. Consider using leasing companies to sell and then lease back your current assets, such as machinery, equipment, computers, software, phone systems and even office furnitured. Use the inventory you have on hand to secure a loan or line of credit.