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Debt Financing or Off Balance Sheet Financing?08/01/2012
In this article, we are going to go over 2 types of financing: Debt Financing and also Off Balance Sheet Financing.
Off-Balance Sheet Financing has no affect on the Balance Sheet. Hence the title OFF balance sheet. There are two types of off balance sheet financing: Factoring and Equipment Leasing.
Debt Financing describes a conventional loan issued to a small business that creates a liability on the balance sheet. Because of the nature of this type of financing, it has an effect on debt-to-income ratios that are considered when applying for loans in the future or gaining access to capital.
Equipment Leasing allows a business to buy equipment with rental payments, and also the balance sheet will not be effected with debt-to-income ratios which could delay future access to capital.
You might need to ask your financial advisor if Equipment Leasing is the right decision for your small business. The key point is: There is absolutely no reason to hold-up your working capital when you can rent to own the equipment. Even if the cost of the funds is greater than a conventional loan, also the rent payments to the leasing company are 100% tax deductible, and quite often that alone may counteract some of the extra cost.
Another type of Off-Balance Sheet Financing is called “Factoring” or Accounts Receivable Financing. Factoring is the purchase of a businesses accounts receivable. The factoring company (neebo capital) converts the accounts receivable into cash and leaves your business with cash-on-hand with no receivables. Factoring isn't a loan, thus there is nothing to repay. Click here to read our free Factoring guide which explain the pros and cons of Accounts Receivable Financing.
If you are asking yourself who takes advantage of Factoring? Business owners that face rapid growth and find themselves short of cash that they need to meet day-to-day operating expenses. Lots of business owners, during their 1st financing stage, never expect to have rapid growth. Small businesses can access capital by tapping into a personal checking account, using credit cards or applying for a home equity loan but they may fall short of cash when irregular sales patterns occur.
Fluctuating sales can interrupt the working capital needed for supplies, rent, payroll and daily expenditures. This really is a frequent situation that is usually not anticipated in the financial planning of the business. Any time business growth out paces working capital, you will find that few options are available.
Business people, who frantically seek financing, normally go to the same source: their Bank. However banks offer Debt Financing. They then get burned out after they travel to 10 banks and come to find out that the absolute maximum amount of their loan can only match the collateral their company can offer. Most start up business don't have enough assets or equity to meet the loan requirements. In addition, conventional loans take weeks to get moving and might not get approved in time to fulfill current requirements.
Factoring which is a form of off-Balance Sheet Financing is available for fast growing companies that sell on credit terms for their customers or commercial accounts. This is the easiest and most flexible financing method available today. It requires setting up a credit-line by advancing money into a business by offering it's accounts receivable as collateral. The invoice created by the business for services or products accepted by the customer is considered a realized asset by the factoring company.
Exactly how does it work?The first step is you’re a business invoices its customer. The factoring company(neebo capital) then buys the receivable from the business at a discount, typically .59 – 1%. Next the factoring company give cash to the business and sends the original invoice to it’s customer.
After the factoring company waits until the invoice is paid. It really is that easy! Normally the process takes about 5 to 7 working days to set up & the business owner does not need to have a good credit score to be approved. Factoring companies (neebo capital) relys on the credit worthiness of the customer not the business owner. Why? because the invoice for the product or service is the collateral used to fund, not your credit score.
Quick Link to Financial Resources:
|Purchase Order Financing||Accounts Receivable Financing||Asset Based Lending Options|
General Articles about Accounts Receivable Financing and Factoring:
» 03/23/2013 Export Factoring - Finance International Sales
» 09/15/2011 What to know when selecting a Factoring Company