By Linda Earls
The economy is improving. Business is picking up. Contracts are being signed. New customers are contacting you and requesting your help. Your business has survived the recession. But wait a minute. Where is the cash? How come, when business is increasing, cash reserves are low and getting lower? How come, when your contracts are with such stellar organizations, your Account Receivables Aging is increasing at an alarming rate?
Many of the larger organizations, whether they are government, nonprofit or commercial have rigid payment procedures. You need to understand what their payment practices are and how it will impact your cash flow before you decide to accept their business. For instance, in order to remedy budget gaps, some governmental entities have "shutdown days."
If your bill is scheduled to be paid on a shutdown day, you will probably not get paid until the next payment cycle. This will push your wait time at least a week and often two or more weeks from when you expected payment. If you have already waited 60 days or more for your scheduled payment, this delay can have a serious impact on your business.
In order to bridge the gap between your cash and your payables, you turn to traditional forms of financing such as credit lines, loans, credit cards, family and friends. What do you do when these options are not available? Traditional financing is currently harder to get than in the past. In fact, commercial lending institutions are predicting that they won't be loosening their lending practices for at least the next five years. Where else do you turn?
How Factoring Factors into Your Business
Although organizations are conducting more business, they are taking longer than ever to pay. Nationwide, the average length of time for an invoice to be paid is 72 days from invoice date. Many of the largest organizations have payment guidelines that state they will pay 90 days or more after the invoice is finally accepted. Can your firm wait that long for its money? And yet, these same clients are calling and requesting more of your services and expecting you to advance them even more credit.
One way to improve your cash position is to use factoring. Factoring, also known as Accounts Receivable Financing, is simply selling your uncollected invoices to a Factor—someone who wants to buy your invoices—today, instead of waiting for your customer to pay you tomorrow or three months from tomorrow.
Factoring has been in existence since the East India Company was plying the waters between England and the Far East in the 1600s. The Factors would advance the ships captains the money they needed to sail to the Far East and purchase the goods to bring back to England. When the ship returned to England in a year or two and the goods were sold, the Factor recouped their investment plus a processing fee and the captain got the remainder.
Factoring works the same today, just on timeframes of one to three months instead of one to three years. Today, your firm provides a consulting service and presents your customer with an invoice. Your customer puts the invoice into their Account Payables system and schedules payment sometime between 30 and 180 days depending on their policies.
Factoring your receivables eliminates the long wait for your money. The day you present the invoice to your client, you also send the invoice to your Factor. The Factor verifies the invoice with your customer and then pays you the agreed upon advance percentage—oftentimes the next business day. Because the Factor now owns your invoice, your customer will pay them instead of you. Once the Factor receives payment for that invoice they hold out the agreed upon processing fee and send you the balance of the invoice.
The Factor makes the decision on the advance rate and the processing fee based upon your clients' credit worthiness. The more credit worthy your clients are, the higher the advance rate and the lower the processing fee.
How Factoring Can Help Your Business
A mid-sized consulting firm wanted to increase the number of contracts they could accept in a year. In the past, they had to wait upwards of 90 days for each invoice to be paid. This restricted their ability to take on new employees to service the contracts. By factoring their receivables, they started receiving the majority of the invoice within days of presenting the invoice to their client. They were then able to keep their high-quality employees to keep their clients happy and accept more lucrative contracts.
Benefits of Factoring include:
• Increase cash without increasing debt
• Focus on core business
• Eliminate collections calls
• Predictable cash flow
• No credit limits
• Unrestricted use of funds
• Improvement in your company's credit rating
• Flexibility of a built-in credit department
A small consulting firm wanted to start accepting contracts from a Fortune 100 company. This company has a payment policy of 90 days after the invoice is accepted in the required format with no billing errors. The firm couldn't access a credit line or other traditional loans in order to finance the gap between invoice and payment. Luckily, they investigated factoring and were able to accept the contract and have now grown into a mid-size consulting firm.
There are many Factors across the country and they all want different types of business. Some Factors focus on a certain industry. Some Factors want to work with small companies, others with only large companies. Some Factors want to lock the company into a long-term contract, others want to offer their customer the flexibility to factor individual invoices as needed. There is literally a Factor that will handle any business situation, though it may take a while to find the right Factor for unusual requirements.
To Buy or Lease, That Is the Question
You have decided it is time to acquire new equipment, whether that equipment is office furnishings, computer systems, software, or the myriad other items required to make your business successful. One of the first hurdles you face is how to pay for the equipment.
If you decide to lease instead of buy, you will be able to tap into a segment of the financial industry that you may have ignored in the past. Some leasing companies work with a specific manufacturer, some are focused in a specific industry and some are generalists. One thing they all have in common is that they buy the equipment from the retailer and lease it to you. Some leasing companies offer you a lease-to-own contract, others a straight lease with the leasing company retaining ownership of the equipment. Leasing companies are very flexible and willing to work with you to make sure you get the equipment you need.
Advantages of leasing:
• Streamlined application process
• Acquire more equipment
• Save on-hand cash for other business needs
• Acquire equipment without tying up capital
• Keep existing lines of credit intact
• Maintain a competitive edge
• Realize tax advantages
• Simplify accounting
A mid-sized consulting firm had delayed upgrading their computer systems and software. Finally accepting the inevitable, they did their due diligence and determined the appropriate systems to acquire. Their lending institutions wouldn't extend their credit lines in order to make the purchase. By turning to leasing, the firm was able to update their computer systems thus allowing them to serve their clients more efficiently and productively.
Conclusion
Whether or not your firm has traditional financing available for use, knowing about factoring and equipment leasing will help you make knowledgeable financing decisions in the future. When you decide to investigate alternative forms of financing, you will be able to find these firms through word of mouth, Web searches or by using a firm that specializes in helping businesses get the alternative financing they require.
Linda Earls is owner of Augusta Capital Group and has been consulting with businesses across the United States to help them achieve alternative financing, including factoring and leasing, for more than six years. She can be reached at Linda@AugustaCapitalGroup.com.
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