Factoring is defined as the purchase of an Invoice for a business to business or business to government transaction for products delivered or services rendered in the past, at a discount. Factoring is NOT a LOAN; it is the discounted purchase / sale of a non performing asset (Invoices) that is paid over time.
Before the 1980s factoring was used primarily in the garment, textile, and furniture industries – typically only available to larger companies. Factoring has since become a widely accepted financing alternative and in many cases the financing tool of choice do to credit crisis and economic meltdown.
Factoring related transactions are somewhat vast. By definition, invoices must be from one business to another business or; from a business to the government. With this in mind, the number of potential prospects is STAGGERING! Ask yourself this question; “How many businesses do you know of that provide a product or render service to another business or the government”? Now ask: “How many of those businesses are getting paid in less than 30 days, 45 days, 60 days, 90 days? Eighty – National Average for Invoices to be paid across North America is a whopping 73 days!
In today’s credit climate businesses are holding on to their cash for as long as they can. This means that suppliers to these businesses are getting “stretched out” – regarding payment. Companies that were accustomed to receiving payment on their invoices in 30 days are now faced with the reality that the payment cycle is now surpassing 60 days or more. The trickle down effect of this is tremendous.
Without the needed cash flow, companies are forced to make tough decisions. Employees are being let go (no money for payroll), supplier payments are delayed (resulting in delayed or cancelled shipments for future orders), delaying payment of operating expenses (negatively effecting the company’s credit history which will adversely affect their purchasing power), payment of taxes are delayed (resulting in judgments and tax liens). By selling their invoices a company can receive up to 90% of the total face value of an invoice creating immediate cash flow to sustain the day to day operating challenges.
PURCHASE ORDER FUNDING
A Purchase Order is a formal agreement between a company (supplier) and a customer regarding a product being shipped on a certain time and sold at a certain price.
Purchase Order Funding is a short term financing tool that provides 100% of the cost associated in filing a purchase order from a creditworthy customer. When a business (distributors, wholesalers, resellers, new start up company) receives a purchase order for a product, the business often needs money in advance to pay the supplier for the product that has been ordered. In most cases the purchase order has to be for a finished good or product to qualify for Purchase Order Funding.
Purchase order transactions are distinct from factoring transactions in that purchase orders are simply a promise to buy goods rather than an invoice for goods already delivered.
ASSET BASED LENDING (ABL)
An Asset Based Loan is a formula based credit facility often used by companies with high financial leverage and insufficient cash flow. An asset based loan is secured by pledging the borrowers accounts receivable, inventory, machinery and equipment as collateral for the loan. Companies in the manufacturing, distribution and service industries are good candidates for an asset based line of credit.
When evaluating a potential loan an asset based lender always focuses on the ability to monitor the collateral and the strength of the collateral as the source of repayment for the loan. This is different from a “traditional” bank loan where the credit decision is based on the current financial strength of the business.
MERCHANT CREDIT CARD ADVANCES
The need for cash flow is constant for any small business. The combination of increasingly more consumers using credit cards and debit cards has made the Electronic Payment systems flourish. We are using less cash and checks than ever before and the growth of the use in debit cards and credit cards is on the rise.
Merchant Cash Advances is defined when businesses sell a portion of their future credit card sales at a discount in exchange for a lump sum of working capital today. Merchant Cash Advances are integrated with the customers’ credit card processing, obligations are met through automatic deductions. The credit card processor automatically sends a fixed, predetermined percentage from each credit card sale when it is settled. Collection stops automatically when the full amount bought is retrieved (on average within 7 to 8 months). A merchant Cash Advance is NOT a loan.