Factoring Applications And The Time Value Of Money
Banks have stringent loan criteria thus it is wise to consider another means of acquiring funds to operate the business.
When acquiring business financing, a company should also take into consideration not only the cost of getting a loan but also the fact that business operations and cash flow problems make it time-sensitive. When a business is busy taking and filling orders, it is difficult to operate efficiently while waiting for a commercial loan application to be approved particularly when ultimately, it might be turned down.
The application process for factoring invoices is very quick and simple. A factor generally needs to know what industry you are associated with and whether your clients are creditworthy debtors. Factors also need to know whether another credit source has secured a lien against the accounts receivable through a UCC-1 filing.
The company needing factoring can get an answer back from underwriting just from submitting an aging accounts receivable report plus accounts payable. Those two reports give a factor enough information to determine whether factoring is possible and to submit a proposal to the company listing the terms of agreement. A minimum of other paper work is required once the proposal is accepted. It takes about ten business days thereafter before receiving the first funding.
Only business to business or business to government invoices can be factored. .All or some of the eligible outstanding accounts can be funded on the initial submission Thereafter, only new invoices can be submitted.
There is a lot of flexibility in invoice factoring. A business does not have to submit all invoices. If the company is capable of financing the accounts for thirty days, it can do a delayed submission for only the invoices extending past the thirty day invoice cycle.
Some factors prefer factoring accounts that even extend to ninety days past the date of the invoice. The reason is that many government agencies and large companies have great credit but use their clout to exploit the tolerance of smaller and middle size companies that want additional business. Often, smaller companies will tolerate late-pay clients in order to maintain a profitable relationship although frustrating when it creates cash flow problems.
When a company is growing and needing additional funding, it is a time-sensitive issue. There is no need to apply for additional funding. As the amount and number of invoices increase, it continues to grow. Factoring can also be considered an off balance sheet line of credit because it is the sale of an asset rather than a loan. It is a debt-free line of credit. However, the company is using the good credit of its clients rather than its own credit to get financing for the business.
Not only is factoring time-sensitive but also transitional. Ultimately, a company wants to build credibility with conventional lending institutions in order to be able to borrow funds at a lower cost as needed,
There are several Fortune-500 companies who used factoring as a way to transition to conventional financing. When a company is experiencing growth, it is imperative to have some kind of financing readily available. Otherwise, the company has to turn down profitable contracts.
Seasonal businesses often have "peaks & valleys" in their business operations. Factoring is a way of taking the "cash flow speed bump" out of the picture by having the cash to continue seamlessly when there is a large influx of orders.
In order for a company to grow and flourish, it must have a positive cash flow. Knowing of alternative sources of financing is beneficial to businesses needing financing.
by: Russell Wardle
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