Financing Cash Flow Through Alternative Financing

Financing Cash Flow Through Alternative Financing

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Alternative financing is something one should consider when the bank or loan institution has said "no" to a line of credit or loan.

The first thing one must do is become familiar with what is available to finance the business outside of the bank or conventional loan institution. Rather than considering debt, why not look into debt-free financing?

One consideration is to factor business to business invoices. The way this works is a company submits some or all of its invoices to a third party in return for an eighty-percent advance. The factor then becomes the owner of the account. Once the factor receives payment for the invoice, the other twenty-percent minus a discount is paid to the factoring company.

Factoring business to business invoices does not adversely affect the balance sheet. The conversion of an invoice to cash actually improves the balance sheet. By converting the accounts into cash, the company also becomes more soluble.

It is not necessary for a business to apply for additional funds when factoring. The amount available increases automatically as the business grows. It is one thing that makes factoring more flexible than conventional loans.

One of the ways a company can offset the cost of factoring is by taking advantage of discounts offered by suppliers for early-pay. Often, suppliers will offer a discount if paid within ten days. Conversely, the company benefiting from factoring can discontinue offering early-pay discounts. The main reason for a company to offer early-pay discounts is to increase cash flow.

How does the relationship between a company and clients change as a result of factoring invoices? It is always in the best interest of the factoring company , the business and the business client to have the best relationship. When there is a problem with payment of the invoice, the factoring company will refer the problem back to the company benefiting from factoring to deal with their client. They are always the first line of contact.

When a company already has a conventional loan or line of credit that is inadequate, it is still possible to also factor invoices. The factoring company must be in a first position collateral position in order for factoring to take place. However, when a bank understands that factoring will make it possible to pay periodic payments, often the bank will subordinate to the factoring company.

When the company has applied for factoring, a factor needs to know about the aging accounts receivable, accounts payable and have a sample copy of an invoice. Other supporting financial documents are also helpful. The factoring company is usually able to accept or reject with a day or two. Actual funding is usually possible within about ten working days. All of the eligible outstanding invoices can be included in the initial funding. Thereafter, only new invoices can be factored.

Companies accepting credit cards participate in the basic principles of factoring. It is actually a form of factoring. One of the differences is the invoices are paid in two installments whereas credit card invoices are paid in only one installment. In either case, there is a discount charged.

Another difference between accepting credit cards and factoring is the invoice has to be paid in full before the company receives the amount held out for a reserve whereas credit card invoices are paid as long as the business has gotten approval on the credit card purchase.

Many companies have the ability to finance invoices for the first thirty days. Thus, it is less expensive for a business to delay submission of invoices thus saving on the amount charged for the discount. However, the cost of the discount is determined in part by the volume and amount of invoices.

One of the most important considerations is whether a company has a cash flow problem. The main purpose of factoring invoices or purchase orders is to resolve cash flow issues. When considering the cost of factoring, one must know the time-value of money. Money today is worth more than money tomorrow. When money today is imperative in order to meet payroll, taxes and accounts payable, it is perhaps well worth the extra cost.

If you have a company that has been turned down for a line of credit, you should check into business financial alternatives such as factoring.

About the Author:
Russell Wardle is president of Corporate Capital Source. His company provides nationwide commercial financing, factoring and equipment leasing. Contact him at 801.676.0579. Also visit at:
http://corporatecapitalsource.com



Article Originally Published On: http://www.articlesnatch.com


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