Copyright © 1999-2002
Seaside Equity
Associates, Inc.
All rights reserved.
|
|
|
What is Factoring?
Most new businesses fail in the first year, and though under-capitalization usually
gets blamed, the real reason is often poor cash flow. Cash flow needs are not
restricted to start-up operations, many established and even thriving businesses
will occasionally find themselves in a cash crunch.
One solution that is rapidly growing in popularity is Factoring, which is the process
of selling accounts receivable to an investor rather than waiting to collect from the
customer.
"Factoring is a fancy term for a basic concept that has been around for centuries,"
says William Barlow, CFS, President of Seaside Equity Associates, Inc. "A
receivable, or an invoice which has not been paid yet, has value. It is a debt that
your customer has agreed to pay in the very near future. Factors are investors who
will pay cash NOW for the right to receive the future payments of your invoices."
Factoring offers a number of benefits to cash-starved companies. Instead of having
to wait 30, 60, 90 days or longer for payment on a product or service that has already
been delivered, a business can factor - or sell - their receivables for cash at a
slight discount off the face amount of the invoice. The almost-instant cash can be
used to meet payroll, fund marketing efforts, or provide needed working capital,
along with a myriad of other needs.
"I have seen Factoring provide the means for a manufacturer to replenish inventory
and make more products to sell without having to wait for earlier sales to be paid
for," Barlow says. He adds that Factoring isn't just a cash management tool for
manufacturers."
Just about any type of business has the potential to benefit from Factoring.
A typical business that extends credit will have 10-20 percent or more of it's annual sales
tied up in accounts receivable at any given time, says Barlow. " Just think a moment
about how much money is tied up in 60 days worth of receivables, and then think
about what you could do with that cash if you had it on hand," he says. "You can't
pay the power bill or this week's payroll with a customer invoice, but you can sell
that invoice for the cash to meet those obligations.
So how does Factoring work? Barlow says the process is Easy and Fast. The factor
purchases the invoices at a discount, usually a few percentage points less than
the face value of the invoice.
"Most consider the discount a cost of doing business - and it's a small cost at
that." says Barlow. " A small discount for a 10 to 30 day invoice is common.
Compared with the problem of not having cash when you need it to operate, the
fee is negligible. Most businesses just treat the factors discount as
though they had offered the customer a discount for paying cash. It often times works out
the same. I've heard of other companies that consider the discount the same way
they treat a sale price rebate - It's just the cost of generating cash flow, much like
discounting merchandise is the cost of generating sales.
About
Factoring | Affiliations |
Mission Statement | Mortgage
Purchasing | Biz Note Purchasing
Annuities | Contact
Us | Links | E-Mail
| Home
|
|
