When Considering Financing, Consider Your Paper Assets

Banks have had to tighten their credit policies because of the downturn in the economy. It is difficult for a business to obtain adequate funds to operate unless the company has an excellent track record and credit history. In order for a business to flourish, it must have a positive cash flow.

At times when a company is having a struggle, it is not easy facing periodic payments that have to be paid on conventional bank loans. It is a real challenge to make periodic payments on conventional loans. Thus, it is attractive to a business to be able to get debt-free financing through factoring invoices. Even when a company has a bank line of credit, application and justification is required to increase that line of credit.

Would it b e of benefit to a company to be able to find a debt-free source of financing that would grow automatically as the business grows? Would it also be beneficial to be able to obtain that financing based on the credit history of clients instead of the company's credit? This seems to be a win-win dream come true!

More companies are finding an alternative that grows automatically as the company grows based on credit history of clients, doesn't require periodic payments, doesn't adversely effect the balance sheet and best of all is debt-free. Some Fortune-500 companies have even used that source at a certain stage of development. It is called financing invoices or factoring.

Companies should consider the fact that they have a paper source to draw from in times when their cash flow is being effected by carrying accounts receivable. Because of regulations and red tape, businesses have to carry government accounts receivable for more than thirty days. When extending thirty days on an invoice, it is no different than extending a loan even though the business is not capable of making loans. A company that extends net-30 days is in essence granting a 30-day interest-free loan.

One of the problems with the terms of net-thirty is that not all invoices are paid within that thirty days. Recently the economy and other conditions have increased the average time it takes for companies to pay invoices to almost sixty days from the date of invoice even though the terms are thirty. This is particularly true of the relationship between small companies and large companies. This is also true of businesses invoicing cities, counties, state and federal government. More often than not, it takes government agencies more than sixty days to pay an invoice.

Factors advance up to eighty percent of the amount of an invoice almost immediately. Once the invoice has been paid, the factor pays the other twenty- percent reserve minus a small discount. It is similar to the way credit card companies pay merchants. When a business accepts a credit card for an invoice, the credit card company pays the business almost immediately but also charges a discount. There are two main differences between accepting credit cards and factoring.

1. A credit card company pays in one installment as compared to a factor paying in two installments. 2. Credit cards are accepted for consumer invoices whereas factoring is only for business to business or business to government invoices.

Factoring should be considered a time-sensitive and transitional as a means of qualifying for less expensive conventional financing. The one thing above everything else that causes businesses to fail is the lack of cash to oerate the business.Therefore, factoring is a viable option. Businesses can grow only when there is adequate financing to operate efficiently.

A successful business is one that company officials are able to use creativity in advertising, marketing and working out the logistics of more efficiency in all aspects of the business. Financing also requires some creativity and even considering alternatives to conventional financing. Often, the most viable alternative is to consider invoice factoring.