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Receivables Financing

 

If you are now either receiving payments or anticipate the receipt of payments in the near future, those receivables can probably be turned into immediate cash. Those payments might be the result of an invoice, a purchase order, a contract, or medical billings.

If you are issuing invoices for your products or services to credit worthy customers, you can speed up the receipt of your money with accounts receivable financing. (For example, rather than waiting a typical 45 days for a Net 30 payment, wouldn't you rather have the use of that money within 24 hours?)

Account Receivables financing, also referred to as "factoring", can be a very powerful financing tool for businesses in a growth phase, a new business with no credit history, or one with seasonal fluctuations. This kind of financing has been used by businesses for many years.

Factoring: This is a fast and flexible means of obtaining cash for your receivables when you can not get financing from traditional sources. It is typically most useful for temporary or fluctuating cash flow situations and for fast growing businesses. Whereas banks lend money based on your ability to meet restrictive credit and other business criteria, factoring is based largely on the credit worthiness of your customers. It provides you with immediate cash from the "sale" of your receivables, leaving your credit position intact and not affecting your balance sheet.

Advantages:

  • Fast Turnaround - Speed Up Cash Flow
  • Does Not Depend On Credit Worthiness Of Your Business
  • Does Not Appear As A Loan On Your Balance Sheet
  • >Free Customer Credit Checks
  • Reduced Internal Labor
  • High Fund Limits
  • Do Not Need To Tie Up All Receivables
  • Client Has Some Control Of Cost
  • More Bargaining Power With Your Suppliers Or Vendors
  • Don't Need Collateral
  • Flexibility
  • No Restrictions On The Use Of The Money
  • Concentrate More Time On Your Business
  • No Long Term Contracts
  • Stop Offering Early Payment Discounts
  • Receivables Management

 

Disadvantages:

How Factoring Works: The client (you) invoices the customer. The factor "buys" your invoice - your receivable. The factor advances between 75 to 95% of the face value of the receivables in cash to the client within 24 hours of receiving the invoice. The factor company then waits for payment of the receivable from your customer. When the customer's payment is received, it offsets the advance made to the client and the balance is allocated to the reserve account. The company then takes their earned fees from the "reserve account" based on the time value of money and returns the reserve balance to the client.

>*A factoring example:
$10,000 Invoice amount submitted to factor
$9,000 Client receives from Factor within 24 hrs of submission of Invoice.
$1000 Factor holds "balance" in Reserve Account as a bookkeeping entry  
$10,000 Factor receives Customer payment several days later
$700 Client receives balance of Reserve Account
$9,700 Total received by Client for the Invoice
$300 Actual cost to Client to receive 90% on his Invoice upfront and to not have to wait perhaps as much as 60 to 90 days to get paid.  
* This example assumes an advance rate of 90 % and a fee of 3%. Advance rates can vary as much as 75 to 95%. (Some high risk industries can be lower.) The fee is based on the time value of money to the factor. The rate might be computed on a daily, weekly, 15 day or 30 day cycle.

Forfaiting: Forfaiting is basically a special form of factoring that works across International borders. It is the discounting of trade receivables without recourse to the Exporter. It is a highly flexible technique that allows an exporter to grant attractive credit terms to foreign buyers, without tying up cash-flow or assuming the risks of possible late payment or default. Simultaneously, the exporter is fully protected against interest and/or currency rates moving unfavorably during the credit period.

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