Financing Cash Flow Through Factoring Invoices

When a bank or loan institution turns down a business for a line of credit or business loan, company officials have to think about alternative business financing.

The first thing one must do is become familiar with what is available to finance the business outside of the bank or conventional loan institution. Rather than considering debt, why not look into debt-free financing?

A factor is a third party that advances eighty-percent for an invoice almost immediately after the invoice has been submitted. It is a means of financing business to business and business to government invoices. The factor takes ownership of the invoices and holds a reserve until the account has been paid.

Factoring business to business invoices does not adversely affect the balance sheet. The conversion of an invoice to cash actually improves the balance sheet. By converting the accounts into cash, the company also becomes more soluble.

Even though factoring is generally more costly than conventional loans, factoring offers a great deal of flexibility. There are no periodic payments. There is no need to apply for an increase in a line of credit because the amount available through factoring grows automatically as the business grows, and invoices and dollar amount increase.

One of the ways a company can offset the cost of factoring is by taking advantage of discounts offered by suppliers for early-pay. Often, suppliers will offer a discount if paid within ten days. Conversely, the company benefiting from factoring can discontinue offering early-pay discounts. The main reason for a company to offer early-pay discounts is to increase cash flow.

A business factoring invoices is always the first line of contact with its clients. Thus, when there is a problem with payment of an invoice, the factoring company works with the business benefiting from factoring thus allowing them to work with their client. It is always in the best interest of all parties for the business to maintain the relationship with their clients.

It is possible to factor invoices even though a company has a business loan or line of credit. I that kind of scenario, the bank is asked to subordinate to the factor. The bank is often willing to do so because it allows the business to make periodic payments through improving cash flow without increasing debt and by improving liquidity.

The application process is very simple compared to applying to a loan at a bank. Most of what is needed is an aging accounts receivable report, accounts payable and a sample copy of an invoice. That gives the factoring company enough information to determine whether the company is viable.

Factoring is only for companies invoicing business to business or business to government. When companies accept credit cards for payments, they are participating in the basic principles of factoring. The business receives payment for a credit card invoice almost immediately after the invoice has been submitted. Again, similarly, there is a discount taken from the face amount of the invoice.

Another difference between accepting credit cards and factoring is the invoice has to be paid in full before the company receives the amount held out for a reserve whereas credit card invoices are paid as long as the business has gotten approval on the credit card purchase.

Many companies have the ability to finance invoices for the first thirty days. Thus, it is less expensive for a business to delay submission of invoices thus saving on the amount charged for the discount. However, the cost of the discount is determined in part by the volume and amount of invoices.

It is imperative that a company determine whether there is a need for improvement in cash flow. One must know the time-value of cash when determining the need for financing invoices. When there is a shortage of cash, immediate cash is worth more than money in the future. The main purpose for factoring invoices is to improve cash flow.

It is extremely difficult for companies to operate while having a negative cash flow. It is imperative for a company to be able to pay financial obligations in a timely manner. Every company should have a plan for determining how to grow while taking care of cash flow issues.

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