There seems to always be a point in any business where cash flow is either a problem or hindering one's ability to move forward, grow, etc. As a newer business, you probably haven't built up the profit to be able to deal with situations where invoices being paid late or where clients are asking for extended terms. In the early stages of your business, you rely on regular invoices coming in and being paid on time.
What happens if you get a customer who pays late, and not just by a few days, by a few weeks or even months. Do you have the profit set aside to carry your business through these weeks and months?
‚ÄúThere is really only one way to address cash flow crunches, and it's planning so you can prevent them in advance, says Elaine Pofeldt, writer, editor, and author of The Million-Dollar, One Person Business
In this article, we discuss factoring lines of credit and why you should be using them as a cash flow management strategy in your business.
A factoring line of credit is a line of credit facility with an accounts receivable factoring company that is based on outstanding invoices that will increase and decrease with your outstanding accounts receivable.
If you have an arrangement with a factoring company where they will advance 90% on outstanding accounts receivable, then your credit line would typically be 90% of your eligible outstanding accounts receivable or invoices. You use this line of credit or factoring line by requesting to factor invoices that you have outstanding, and then the factoring company will advance the amount of funds you need in a matter of hours.
To qualify for a factoring line of credit there is an application you will fill out. This will give the invoice factoring company an idea about the overall health of your company and the credit worthiness of your customers.
Factoring companies main concerns when providing a factoring line of credit to a client are:
Factoring companies main concerns are not how many years a company has been in business or what a business owners credit score is. The main concern is that the invoice factoring company is buying invoices that will get paid.
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Just like with bank lines of credit, there are some cases where businesses are not approved for factoring lines of credit. As a result, businesses need to explore other forms of financing for their business.
Some of the common reasons applications will be rejected include:
A factoring company is knowingly taking on credit risk, or the risk of the customer being able to pay the invoice or not. As a result, the company does not want to take on the risk of production. As a factoring company cannot take on a project their client is working on and complete it for them, the factoring company will want to make sure that the job is done before purchasing an invoice. If the invoice is billed before the service is complete, a factoring company would not be able to purchase or fund against it. In the same way, if an invoice is submitted for a service that is only partially completed then the same problem would arise.
As a factoring company is purchasing invoices primarily based on the credit-worthiness of a business customer, they are unable to purchase invoices that are to an individual. Factoring companies are a good fit for companies that have business-to-business or business-to- government receivables.
There are many businesses that simply do not have accounts receivable. Many software companies require payment before any service is rendered and many other types of businesses require up-front payment before starting any work. These businesses would not be a good fit for a factoring company.
There are a number of different factors that will determine factoring costs for your business. One is how long it takes for your customers to pay. But, typically factoring costs starts at less than 1% and can go up to 4% or so if your clients take a long time to pay. Some examples of different fees that you may come across include:
When you're thinking about opening up a factoring line of credit - like anything else - make sure you read your contract thoroughly and familiarize yourself with all the rates and fees. You will avoid any unwanted surprises down the line.
As a small business, you have big goals. Goals that may seem far away due to the financial strain it may put on your business. Afterall, you have employees to pay, expenses to pay, and a business to keep going. But, what if those goals weren‚Äôt so far away? With a factoring line of credit, you don't have to worry about when your invoices are going to be paid because the funds will just be there for you to use. You can start building up your business faster and more securely than you would any other way.
If you have any further questions about invoice factoring for your business, feel free to reach out to us here at Meritus Capital anytime by email at email@example.com or call us toll-free at 1-877-648-3709. We have been providing factoring services to businesses across Canada and the U.S. for almost 20 years!
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