Tough Economic Times Call for Invoice Factoring
The new year of 2009 is starting off with many economic challenges for small to medium sized businesses.small business owners must be quick to put plans for the New Year into works in order to save money, maintain cash flow during these tough times. Learn how invoice factoring can provide much needed reseouces along with other tips for managing cash flow.
The new year of 2009 is starting off with many economic challenges for small business owners. Even with a much needed economic-recovery package, credit will remain hard to obtain.
More than ever before, small business owners must be quick to put plans for the New Year into works in order to save money and maintain cash flow during these tough times. What's more, obtaining loans from banks and other traditional financial sources can be a tedius and often frustrating process.
The good news is that today's business owners and managers do have some alternatives to traditional financing. Once such startegy is known as factoring, which has been around for thousands of years.
Factoring is basically when a business sells its accounts receivable invoices at a discount, and it is different from a bank loan in several ways. Banks base their decisions on a company's credit worthiness, whereas factoring is based on the value of the receivables. What's more, factoring is not a loan - it is the purchase of a financial asset, or the receivable. Bank loans involve two parties, while factoring involves three parties.
Factoring should not be confused with invoice discounting, because factoring is the sale of receivables. Invoice discounting is borrowing where the receivable is used as collateral.
There are three parties involved in factoring including: the one who sells the receivable, the debtor, and the factor or factoring company. A receivable is basically a financial asset associated with the debtor's liability to pay money owed to the seller. It is typically funds that are owed for services rendered or merchandise sold. The seller sells one (spot or single invoice factoring) or more of its invoices (the receivables) at a discount to the third party. Then the factor obtains the cash, so in essence, the sale of the receivables essentially transfers ownership to the factor, who obtains all of the rights and risks.
It is impiortant for small businesses to learn how to manage their cash flow. Usually, more sales means increased cash flow, but when these sales are based on credit, when sales increase, only the accounts receivable increase. As small businesses inventories are depleted after the holidays, and receivables can't be collected until 30, 60 or 90 days later, cash reserves are low.
Here are some tips for managing cash flow:
- Billing, collections and payables systems must be efficient.
- Ne sure you watch your customer's credit limits.
- Try to settle with debtors.
- Share credit terms upfront with clients.
- Review and/or add a cash flow management system.
- Watch overdue accounts closely.
- Manage your own payables and wait as long as you can to pay without late fees.
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ABOUT THE AUTHOR
Kristin Gabriel is a writer who works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. The company provides short-term financial resources including invoice factoring, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in accounting, finance, law, marketing and banking. www.ifgnetwork.com