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Need quick capital? Read this article about Factoring05/22/2013
This article is guide to help your business learn more about factoring. Our firm offers asset-based lending and factoring. Our lending amounts range anywhere from $100,000 to as much as $10 million for a single client.
In its simplest form, factoring occurs when a company sells its receivables to a third party known as a factor. The factor then takes over the collection of the cash due.
The business then receives an advance on their receivables, paying an interest charge on the advance and avoids having to wait 30 days or longer for its customers to pay for goods or services.
To start, Factoring can be expensive…
As you may already know: Factoring cost more than a bank line, however our clients turn to factoring to three main reasons:
- 1. For fast access to capital.
- 2. To make their cash flow more predictable.
- 3. To work towards becoming bankable
Factoring provides an alternative for businesses that need to improve their cashflow but don’t have access to bank lines.
Nonetheless, factoring is more expensive than loans from banks or asset-based loans for working capital, however there are situations in which a small business would be better off using a factoring company rather than a bank. A good example would be a business anticipating rapid revenue growth. By making use of accounts receivable as collateral, a business may be able to acquire more capital to work with than it would by using a bank loan.
Factoring companies finance loans generally to two types of clients:
- 1. high-growth, or emerging businesses
- 2. Financially distressed businesses.
In either situation, their historical cash flow ...which in turn banks use to determine credit-worthiness- does not support their working-capital needs. Factoring is designed to be a type of bridge financing. Mainly because it helps businesses go from unbankable to bankable while permitting them to get access to capital.
How much money a business can receive in advance?
Generally advance amounts can range anywhere from 70 percent to 85 percent of the receivables and will vary by how much the client needs. Companies in certain industries can obtain financing at higher percentages, depending on the situation.
Another advantage of factoring is that it won’t increase the borrowing firm’s debt load and hamper its ability to obtain other financing. Factoring represents a “self-liquidating” loan, meaning that the money is repaid to the lender when the customer pays the invoice.
A factoring firm normally takes a discount fee ranging from 1 % to two.5 percent of the invoice amount, with smaller discounts on larger loans.
As an example, using a $2,000 invoice to be paid by your customer in Thirty days, Your business can get an $1,600 advance from a factoring firm instead of waiting 30 days for payment. When the customer pays the $2,000 invoice in full, the factoring firm pays you the remaining $400, minus a 1.5 % discount or $30.
While factoring is more expensive compared to a bank line, most businesses borrow in hopes of to become bankable within the near future. Our company is there to help you develop a consistent track record of profitability that traditional lenders need to see to be able to lend your business money.
Factoring companies offer additional services rather then just lend money, they also provide clients with accounts receivables management and credit-management services. Despite the fact that most businesses initially seekout a factoring firm because of a short-term need, over and over agian we see those client relationships grow to become long-term ones because small companies often those need other services to augment their in-house capabilities. One value-added services are helping companies improve the efficiency with their billing process, to minimize accounts receivables.
Quick Link to Financial Resources:
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General Articles about Accounts Receivable Financing and Factoring:
» 03/23/2013 Export Factoring - Finance International Sales
» 08/01/2012 Debt Financing or Off Balance Sheet Financing?
» 09/15/2011 What to know when selecting a Factoring Company