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The little-known Solution to a well known problemMost new businesses fail in the first year, and though under-capitalization usually gets blamed, the real reason is often poor cash flow. And cash flow needs aren't restricted to start-up operations -- many established and even thriving businesses will occasionally find themselves in a cash crunch. One solution that is rapidly growing in popularity is factoring, which is the process of selling accounts receivables to an investor rather than waiting to collect the money from the customer. Factoring is a fancy term for a basic concept that has been around for centuries. A receivable or an invoice, which has not been paid yet, has value. It is a debt that your Customer has agreed to pay in the very near future. Factors are investors who will pay cash now for the right to receive the future payments on your invoices. Factoring offers a number of benefits to cash starved companies. Instead of having to wait 30, 60, 90 days or longer for payment on a product or service that has already been delivered, a business can factor -- or sell -- its receivables for cash at a slight discount off the face amount of the invoice. This almost instant cash can be used to meet payroll, fund marketing efforts, or provide working capital. This cash can provide the means for a manufacturer to replenish inventory and make more products to sell without having to wait for earlier sales to be paid. Factoring isn't just a cash management tool for manufacturers. Just about any type of business has the potential to benefit, not just small struggling operations. Eighty percent of the businesses who factor today do it because they are growing not because they are dying. Factoring is especially appealing to young and rapidly growing companies. Since the process shortens their business cycle, these businesses can grow even faster. The inability to make more products to sell while waiting for invoices to be paid is largely eliminated. Such businesses usually net much more profit with factoring than without -- even when the discount is considered. A typical business that extends credit will have 10 to 20 percent of its annual sales tied up in accounts receivable at any given time. Just think for a moment about how much money is tied up in 60 days' worth of receivables, and then think about what you could do with that cash if you had it on hand. You can't pay the power bill or this week's payroll with a Customer's invoice, but you can sell that invoice for the cash to meet those obligations. Factoring is not a loan. It is the sale of an asset. A loan places a debt on your balance sheet, and it costs you interest. By contrast, factoring puts money in the bank without creating any obligation to pay. Finally, loans are largely dependent on the borrower's financial soundness; with factoring, it is the soundness of the Client's Customer and not the Client that matters -- a real plus for new businesses without an established track record. Summary of why a firm might want to sell their invoices:
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