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Utilizing Factoring as a Alternative to Traditional bank Credit11/30/2012
The article below discusses factoring in more detail and explains how businesses are utilizing factoring as an alternative to bank lines of credit.
Company owners have a number of options with regards to acquiring financing for their companies. There is the possibility of using conventional methods, like securing investors or developing some sort of business credit line by using a bank or any other financial institution.
Additionally there is the option for using a factoring company like Neebo Capital and utilizing the companies accounts receivables to finance the continued operation. There are powerful reasons why using this approach is becoming very popular among business owners and may be the right fit for your business.
What exactly is Factoring?
Factoring is a financial strategy that allows businesses to obtain money from their receivables before customers actually remit payments. The factoring company will assess the invoices that are associated with the recently completed billing period and in offer to purchase those invoices at face value.
As part of the deal, the factoring company will advance the debtor(your company) a specified % of that face amount of the invoice, usually in between 80 and ninety percent. In exchange, payments are remitted to a address given by the factoring company and credited to the debtors (your) account.
As soon as the full amount on the advance payment has been settled, the factoring company will allow the debtor (you) access to the remaining collected funds. In return for providing this financial solution, the factoring company will keep a portion of the total value of those receivables called the "discount fee" usually around one to five percent.
Many company owners like this arrangement, since it means there is no need to be eligible for credit through banks or manage a long loan application process. Once the account is set-up, you'll be able to factor each billing period and then make use of the proceeds to pay for company expenses and even pay for expansion and marketing.
What Kind of Businesses Use Factoring?
The use of factoring as a financial technique may apply to a lot of different types of companies. Factoring companies generally establish specific criteria that need to be met to be able to enter this kind of financial arrangement. While larger corporations in various industries are highly more likely to qualify, it's not unusual for factoring companies to work with small business owners that are able to demonstrate a regular cash flow in the form of payments from customers.
The majority of factoring companies will look closely for the applicant’s current conditions. This consists of analysis of the similar industry and also the projected impact the movement of the economy will have on their industry. Additionally, the factoring company will take into account the period of time your business has been operating and the amount of expertise and experience that the management team brings to the table.
In other words, the factoring company will need to make sure that the business they are about to lend capital to isn't going to present a risk that exceeds the advantages of entering into a financial agreement.
Factoring vs. a Business Credit Line
In the past, businesses would usually talk with different banks and select one as their home-base for their business's credit line. This strategy could work perfectly, if any balance charged to that credit line will be paid in full before the closing date.
HOWEVER in cases where an account balance rolls over from billing period to another, the bank will apply interest to that particular outstanding balance. Depending on the credit ratings of the company, the interest rate could be substantial. Carrying an account balance from month to month could eat an extraordinary amount of earnings throughout a year.
THE GOOD NEWS....
Interest is not a factor when companies choose to work with factoring companies. Because the financing is a advance rather than a loan. the business is paying a discount fee for the advance. There is no charge to rollover from one month to the next, you and your company get to start fresh every billing period.
Factoring vs. Acquiring a Loan from the bank
An additional financing method is to secure some type of loan from the bank. With this approach, the business owner gets funds in advance which can be used for anything from meeting pay-roll to funding a new marketing campaign. At the same time, the business owner can also be dealing with another financial duty. Which means that the business will need to arrange its budget to ensure installments can be made on the loan balance until it is paid in full.
Like the credit line, a bank loan involves the application of interest to the outstanding balance. Dependant upon the amount of the borrowed funds, the charges and fees that are bundled in with the initial loan request and the way the interest rate is applied to that balance, the business will often pay a considerable amount back to the bank.
On the other hand, businesses that choose factoring find there's no need to rearrange the operating budget to include another debt obligation. The funds obtained from the factoring partner derive from the need for the purchased invoices. There is no reason incur late charges or to default the loan. Rather, the capital is delivered for fast use and is not subject to interest in any kind. So long as your customers submit payments based on terms, the factoring agreement will greatly benefit your company and the factoring company.
What to Consider when searching for Factoring Companies?
In order for the factoring partnership to be mutually advantageous, it is your responsibility to make certain that the factoring company is an excellent match for your businesses needs. Early on, you need to compare the terms and conditions that will regulate the way the invoices are factored, the % on the advance that's provided on the front end, and the amount you ultimately spend on the service.
You should also be aware of the reporting processes which are in place. This includes having access to an interface that helps you track the receipt of payments out of your customers and also the ability to see how much capital is available for transfer into your company bank accounts.
You also want to the collection policies and procedures of the factoring company work with the processes that your company normally employs. Spend some time to evaluating those processes with the factoring company before getting into any financial agreement. You want to ask to see the templates used for collection letters by the factoring company as well as the basic script which is used in the event that the factoring needs to make collection calls.
The goal is to make certain that the processes are balanced and reasonable, and never likely to result in the loss of a long time client who was a few days late in paying an invoice.As soon as you and the factoring company are satisfied that the arrangement between your two entities is possible, you may proceed with formalizing the partnership.
Keep in mind that if your business should choose to terminate the agreement, it's important to cooperate with the factoring company to end the factoring process in a manner that is in accordance with the terms found in the contract agreement.
This will include covering the balance associated with any leftover invoices that your customers haven't paid, allowing your business to buy back those invoices. After the agreement is terminated to the fulfillment of both sides, your business will once again assume control of issuing its own receivables and collecting the balances due on those invoices.
If you feel that your business would benefit by setting up a factoring program.
Please contact us at 1-888-382-3766
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