Using a Factoring Company

Factoring CalculationsOne of the most common challenges for companies that work with commercial clients is having to offer credit terms. This gives clients the option to pay an invoice 30 to 60 days after you have delivered your product or provided your services. Your company has to cover the expenses of fulfilling the contract and then wait – for up to two months – to get paid.

Offering credit is expensive

Most small companies have to offer credit even though they can’t afford it. Large companies demand it and you have to provide it if you want to earn their business. But providing credit has a cost, especially if your company has tight cash flows. At the very least, it will slow down your growth since you won’t be able to add new clients who may also demand terms.

But it can get costlier. Unless you manage your cash flow very carefully, you could run into problems. You could be forced to miss critical vendor or employee payments. In some cases these problems can be insidious as they tend to happen when your company is apparently growing quickly and presumably doing well.

Of course, it can all come crumbling down quickly. If you don’t have financial reserves, all it takes is a few late payments – or a customer that becomes delinquent on an invoice.

The solution – use a factor

Using a factoring company can improve your ability to manage your cash flow, providing liquidity to pay corporate expenses and take on new clients. It solves the cash flow problem by providing an advance for your slow paying invoices from credit worthy clients. The factoring company intermediates the transaction, and holds the invoice until your client pays.

This reduces the time it takes you to get funds from your accounts receivable from 60 days to as little as two days. The effects on your available cash flow can be immediate – and dramatic.

An important advantage of factoring is that it enables you to offer credit terms to your clients without having to worry about slow payments. Companies that were unable to take on new clients because they could not afford to offer terms can benefit from this service.

Improve the credit of your client portfolio

Factoring companies finance invoices based on their credit. The factor reviews the profile of your clients, your invoicing practices and industry trends to determine this. You can use this to your advantage and have the factor review new and existing clients and use those determinations to offer credit only to companies that have a good payment record.

How does a factoring transaction work?

A factoring transaction is relatively simple and works as follows. Note that this example assumes you have a factoring agreement in place:

1. You complete the work and invoice your client

2. You submit the invoice for financing

3. The factor advances up to 85% of the invoice as a first payment

4. After 30 to 60 days, your client pays

5. The factor advances the remaining 15% (less a fee)

You can repeat this process as often as needed to ensure you have adequate cash flow.

Who qualifies?

To qualify for a factoring financing line you must have credit worthy commercial clients. Although not the only requirement, this is the most important one. The whole transaction relies on your client’s payment track record. Also your invoices should not be pledged as collateral to a lending institution, or subject to a tax or judicial lien.

Will a factor be able to help me?

Although factoring can be an effective solution, it only works if you have a very narrow problem – you can’t afford to wait up to 60 days to get paid by your clients. It provides an effective way to bridge the cash flow gap created by slow paying clients, enabling you to operate and grow your business.

Marco Terry Factoring companyAbout Marco Terry

Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada), a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258.

About Marco Terry

Marco Terry is the managing director of Commercial Capital LLC and Commercial Capital LLC (Canada) a leading factoring and purchase order financing intermediary. He can be reached at (877) 300 3258 and on Google+

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