Value Of Factoring When Filing Chapter 11 Bankruptcy

One of the challenges of managing a business is to have adequate cash flow while carrying accounts receivable. Accounts receivable can cause a shortage of money available needed to continue to operate a business and fill new orders. Transactions from business to business most often require net-30 day terms thus creating a deficiency in cash available to the business.

A business can use the accounts receivable to finance ongoing business expenses through a process called factoring. Since invoice financing is the sale of an asset, it is not entered on the balance sheet as a debt. It is the selling of assets rather than borrowing money. As such, it does not effect the balance sheet as a debt.

One of the features of accounts receivable financing is that a business does not have to have perfect credit. It is possible to finance accounts receivable for companies that have or will be filing for reorganization under a chapter 11 bankruptcy filing if they are doing business with credit worthy clients. It is a great way of working through the bankruptcy. It is a way a business can show a trustee how it is going to be possible to maintain the cash flow in order to make periodic payments to the trustee. A confirmation is more probable if the business is able to prove the viability of cash flow. Factoring is the sale of an asset rather than debt.

A business can consider factoring to be a growing credit line inasmuch as the amount of funds advanced to the company increases as sales increase. It can be considered a debt free credit line that increases as the company grows. It is really the best of two worlds when the only other alternative is to liquidate the business. Solving cash flow problems for the business help improve the morale of the employees and management.

The funds from this type of financing are not restricted. The cash can be used for payroll, accounts payable, purchasing materials, overhead, or equipment. The cash is readily available because a large percentage of each invoice is advanced to the business immediately after goods and services have been delivered. The reserve minus a discount is paid to the company once the invoice has been paid. A factor advances 70-90% of the amount of the invoice followed by another installment of the reserve minus the discount charged.

Factors are actually more interested in the credit worthiness of clients who are being invoiced rather than the company that is the beneficiary of factoring. The invoice is submitted to the factoring company and the business receives an immediate advance (usually ranging from 70-90% of the gross amount) depending on the quality and type of credit worthiness of the invoiced customers.

Some of the types of businesses that benefit from factoring are temporary employment agencies, printing, manufacturing, business machines, janitorial, job training, garment distributors, temporary nursing, temporary accounting, trucking/transportation, furniture, consulting, environmental, telecommunications, retail suppliers, government vendors and construction.

It is particularly beneficial for companies that have periodic payments to be able to meet financial obligations even when invoiced customers are slow paying. Business relationships between large companies and small companies often involve an extension of the net-30-day billing cycle. Factoring provides predictable cash flow because and advance is made immediately after the invoice has been created.

Another advantage of factoring invoices is management of the accounts receivable. Factors provide regular reports in an effort to make sure the invoices get paid. Therefore companies taking advantage of factoring can direct efforts toward more sales rather than collection of past due accounts.

Conventional financing is possible once a company improves credit through better management of the accounts receivable. Ultimately, factoring can be a way of improving the credit rating of a company having a struggle.

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