subject: Aging Accounts Receivable And Managing Cash Flow [print this page] Late payments create cash flow problems for new or growing companies. It is one of the most common problems. Most companies can expect net-30 invoice terms to show up in the 31-60 or 61-90 columns creating a cash flow crunch.
New companies trying to expand have difficulty operating from day to day when their credit does not allow them to have a large enough line of credit to keep up with operational costs and expansion due to additional orders. It is more possible for the company to be successful if cash flow problems can be averted.
When a company is unable to qualify for conventional bank loans, there are alternative ways to finance business operations and growth. Factoring accounts receivable is a viable alternative to allow a company to utilize overlooked assets. Once products and/or services have been delivered, an invoice becomes a company asset. Since factoring is the sale of an asset, it should be considered a debt-free line of credit. The balance sheet is not negatively effected as a result of factoring because the accounts receivable are converted to cash.
A company receives an advance for seventy to ninety percent of the face amount of an invoice depending on the industry. The factor will immediately advances eight thousand dollars on an invoice of ten thousand dollars. Once the invoice has been paid in full, the factor send the other twenty percent minus a discount fee. The percentage of the fee is determined by the factor during the application process. There are no surprises nor hidden costs. A company benefiting on factoring is charged only on the amount of the unpaid balance as per agreement proposed by the factor. It is only the unpaid balance charged the discount fee.
Most companies know the time value of money. Most retail companies accept credit cards even though there is a discount fee they have to pay to the credit card companies. It is a matter of convenience to their customers. The company also benefits because the credit card company pays the company minus a discount almost immediately after the invoice has been issued. In retail, most invoices are automatic electronic submissions.
Factoring is very similar except a factor hold a reserve until the invoice has been paid in full. Thus, credit card companies pay invoices minus the discount in one installment whereas factors pay the invoices minus a discount in two installments. One of the main differences between credit card financing and invoice factoring is that factoring is only for business to business or business to government invoices. Credit card companies pay for consumer invoices as well as commercial invoices. When credit cards are used, businesses and customers are participating in a factoring process.
When a company offers net-30 day terms, it is the same as though the business if offering an interest free loan to another business for thirty days. Often, the company is able to carry the account for thirty days without incurring cash flow problems. Unfortunately, it is usually nearly sixty days or more before companies get paid for an invoice. It could be less expensive and more advantageous for a company to factor only accounts past due.
In an attempt to increase cash flow, some companies offer early pay incentives for invoices paid before they are due. Early pay incentives can offset the cost of factoring. Conversely, if the company has suppliers who offer early pay incentives, the company can offset the cost of factoring by taking advantage of the early pay incentives.
Several Fortune-500 companies have used factoring as time sensitive and transitional in order to solve temporary cash flow problems and to expand business. It is important for business owners and managers to understand how cash flow ultimately effects the bottom line. Often companies turn away business because of a the lack of available cash to finance additional sales. A company must have positive cash flow in order to expand and flourish.
It is also important to find a broker who can match the company with a factor who knows about their industry and specializes in factoring to that particular industry. Most factors can make a proposal including term agreements and a discount rate within a couple of days from the time the application has been submitted. On the initial funding, the company can submit for outstanding invoices. However, the factor advances only on new invoices after the initial funding. The company can expect funds within about ten days after receiving the necessary paper work. Thereafter, they can expect to be paid for an invoice within twenty-four to thirty-six hours after the invoice has been submitted.
A company can grow and flourish only if the cash flows.
by: Russell Wardle
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