Factoring?? Never Heard of it.

2004-08-04T05:30:00.000Z

Over the past fifteen years, growing numbers of small and mid-sized companies have begun to explore factoring as a practical source of working capital. Unfortunately, the availability of accurate, up-to-date information has not kept pace with the mounting interest in this much under-utilized form of commercial financing. We therefore present the following discussion for those seeking a broader understanding of this dynamic alternative to traditional debt/equity funding.

What is Factoring?

The term "factoring" refers to the outright purchase and sale of accounts receivable (A/R) invoices at a discount from their face value. The structure, terms and conditions of such a transaction may vary in any number of ways, as evidenced by the array of factoring programs currently available throughout the United States.

Companies engaged in the business of buying accounts receivable are called "factors." Factors often exhibit a flexibility and entrepreneurial awareness rarely demonstrated by banks and other secured lenders, whose activities are more generally restricted by regulation and prevailing law.

Companies selling their receivables are typically referred to as "clients" or "sellers" (not "borrowers"). The client's customers, who actually owe the money represented by the invoices, are generally known as "account debtors" or "customers."

Characteristically, there seems to be no industry-wide term of art to describe the actual event that occurs when a factor accepts invoices for purchase. Common terms for this event include: "schedule," "funding," "advance," "assignment" and "transaction."

The cash which a factor issues to a client as initial payment for factored invoices is typically called an "advance."

Factoring differs from commercial lending because it involves a transfer of assets rather than a loan of money. In assessing risk, therefore, factors look primarily to the quality of the asset being purchased (i.e. the ability to collect client receivables), rather than to the underlying financial condition of the seller/client. This focus makes factoring a suitable vehicle for many growing businesses when traditional commercial borrowing proves either impractical or unavailable.

Defining Accounts Receivable

In the factoring industry, the term "accounts receivable" normally refers to short-term commercial trade debt having a maturity of less than 90 or, at the outside, 120 days. To be sure, factors sometimes receive offers to purchase longer-term debt obligations, such as leases or commercial notes. The purchase of such debt instruments, however, does not fall within the meaning of the term "factoring" as it is most commonly used.

Factors are universally quick to distinguish between invoices (which represent legally enforceable debts) and purchase orders (which do not). Most factors refuse to advance money against purchase orders under any circumstances. A few, however, have developed separate purchase order financing programs.

Similarly, factors generally refuse to purchase "pre-ship" invoices that clients sometimes generate prior to shipping goods or providing services to account debtors. Many factors will immediately terminate a factoring relationship if they discover that their clients are attempting to factor "pre-ship" invoices.

[Hope this clears up a few things. After you request the e-doc give us a call with any questions you may have.

Download the full e-doc titled "The Basics of Accounts Receivable Factoring"

Cash Is King

2004-08-03T21:08:00.000Z

If you have ever wanted to start a business, DON'T DO IT...yet.

Let me explain. There are many businesses that are started and many more that fail. Starting a business is difficult just remember, Cash Is King.

Cash Flow is essential in running any business. You know that, we know that but why do businesses especially small businesses neglect this fact. There are many reasons but most importantly small businesses want to make sales and keep their customers happy.

Here are 10 tips to consider to improve your Cash Flow (happiness).

Banking. Very simple concept. When you receive payment deposit it. You are not too busy to do that, Are you?
Billing. Waiting to mail the invoice until the customer receives the goods is usually not wise. Send the invoice with the goods and a follow-up in a few days. This ensures visibility to the customers A/P department.
Fill and Ship On Time. Makes sense but there are many issues that can prevent efficiency. The sooner the customer receives the goods the sooner they can pay.
Offer Trade Discounts. Incentives will encourage customers to pay sooner. However, you must have the margins to be able to afford the discount. Factoring may help.
Follow-up on Past Due Accounts. Don’t hesitate on this point. It is the most crucial aspect of cash flow management. If your customer knows you are on top of your A/R chances are they will pay you first. Keep a record of the call and follow-up if payment has not been received when promised.
Established Credit Practices. In a rush to make a sale the one thing that gets overlooked is the customers credit rating. Check with Credit reporting agencies and trade reference organizations to find out how quickly or slowly they pay their bills.
Supplier Payment Terms. Just like point 4 only you are asking suppliers for an extension of credit. They may be in a better cash flow position and may accommodate you if you buy more from them.
Inventory Control. Inventory needs to be sold, not give you something to dust off. Look at inventory as an asset worth cash, the catch is it’s worthless unless it is sold.
Reducing Expenses. Common sense right? Wrong. Businesses are so involved in keeping things going they neglect to look at all expenses. Reduce the expenses and don’t cut costs that hurt your profits. The worst thing to cut is Marketing, with few exceptions. The best thing, cut your perks.
You’re A/P Department. Don’t pay bills before they are due and don’t pay bills late, especially if you will pay a late fee. Obviously, if you are made an offer to pay early for a discount, then consider the opportunity cost.

Short and sweet. My kind of list. If you don't want the world to know your thoughts view the profile and e-mail us.

Copyright 2004 Continuous Cash Flow, llc
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