What is invoice factoring? Accounts receivable financing, also known as invoice factoring, is a powerful financial tool that fueled the growth and success of a number of companies. Factoring enables companies to maximize their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies immediately get paid for their work charged from the factoring finance company, while the factoring company waiting to be paid by the customer. Factoring strengthen the cash position of the business' by shortening the time to get invoices paid in 48 hours and provide the funds needed to meet current expenses and target new challenge opportunities.Invoice BenefitsAs Factoring Loans and Lines the credit needs of the client have tangible assets and strong financial, factoring relies more heavily on the financial strength of the client's customers.
This is an important feature, since many new and small businesses do not meet the financial criteria of traditional lending institutions. However, many small businesses have a strong list of financial customers that can be exploited. Factoring empowers businesses to capitalize on their list of customers, and provide them with the tools to turn receivables into immediate cash, without generating debt. Because factoring is not a loan, a perfect financial products as follows: o New and growing businesses, including small businesses and homes, and business consultant Business customerso financial solo preneurs.o strong as it prepares to Businesses grow significantlyo intangible assets (eg consultants) or businesses that do not want to take the loanAn added benefit of factoring is that factor usually assumes part of the credit risk of clients' for customers. This means that if a customer becomes insolvent financial due to bankruptcy and not pay the invoice, the factor will assume the loss. This is a valuable service for small companies may not be able to afford the cost of bankruptcy customer.CostsThe factoring transaction - also known as the discount - vary based on a number of variables such as financial strength customers and the value that counts. In general, the discount is a percentage of the invoice face value that increases with time until the invoice is paid. Small businesses, those that have between $ 20,000 and $ 300,000 in annual revenue, you may expect to pay a discounted rate of about 2% for every ten (10) days of the invoice is not paid. Businesses with factorable revenues of over $ 300,000 can expect lower discount rates.Factoring Work: Business Services and Products, Inc. Case StudyBusiness Services and Products, Inc. (BSP, Inc.) is a small feat, produced only company, which provides business consulting and equipment for local companies. It has a $ 300,000 annual revenues and during the past year BSP Inc. has enjoyed significant sales growth. Although most business owners will be very happy to manage the company, Jane Sullivan, BSP Inc President, is very concerned about the financial position.
Most BSP Inc. customers are large companies with a good reputation for always paying their bills. However they always take between 30-45 days to pay them. BSP Inc., however, have to pay their employees every two weeks and their vendors every four weeks. The difference between the time customers pay their bills and the time BSP Inc. to pay employees and vendors has created cash flow problems in past.Furthermore, the cash flow problems caused Jane to delay Payroll twice this year and placed her trade (vendor) credit in jeopardy several times. It also led him to deliver a number of significant business opportunities because he believes the company's financial ability to hire and pay for the additional staff. Unfortunately, BSP Inc. did not have a large enough financial cushion in the bank to pay paying employees while waiting for 45 days new clients to pay their invoices.The following table provides an overview of BSP , Inc. the current financial position.Business Services and Products, Inc (without financing) Annual sales: ............................ .... $ 300,000 Lost new sales opportunities: ... ....... UnknownTotal Sales: ................................. $ 300,000 Variable costs (60% of sales): ......... $ 180,000 Fixed Costs (Rent, telephone, etc.): ........ $ 20,000 Total Cost: ............... .................. $ 200,000 Revenue (Sales - Costs): .................... $ 100,000 Although the company's outlook looks great, Jane may have to stall its growth until she builds a large enough cash cushion in the bank to finance its growth.After careful consideration, Jane decided that a factoring Lines of capital could help strengthen the financial position of the company. Furthermore, factoring her invoices would enable BSP Inc. to take on new customers and continue to grow, knowing that he could take advantage of her slow paying customers. Financing agreement with BSP Inc. 's provides the company with a 70% down payment for his services bill. This means that the company can earn 70% of the face value of the invoice joined in the next 24-48 hours of submitting them to the factor. The remaining 30% of the funds, less the factoring fee, is quickly rebated as soon as the customer pays their working capital line invoice.
This strengthen the financial position of the company and a bank account, which allows Jane to pay for new employees for the new service contract. Jane also decided to use the extra capital to pay her vendors early, take prompt payment discounts and helping to reduce costs factoring.BSP Inc. customers pay their invoices within 30 days of receipt. Discount (factoring fee) for these invoices is 6%. Each time the invoice paid, factor rebates BSP Inc. the remaining 30% do not go less the factoring fee. This means that after the transaction is completed, the factor rebates 24% (30% - 6%) to BSP Inc.Thanks a factoring line of working capital, Jane was also to secure an additional $ 120,000 worth of business , bringing its annual revenue to $ 420,000. The following table shows the financial position of BSP Inc. 's year after using factoring.Business Services and Products (with factoring) Existing Sales: ............... ....... ............. $ 300,000 New Sales: ................................. ...... $ 120,000 (factor) Total Sales: ..................................... . $ 420,000 Variable costs (60% of sales): ............. $ 252,000 Fixed Costs (Rent, telephone, etc.): ........... Factoring costs $ 20,000 (6% of $ 120,000): ......... $ 7200 Total Cost: ............................. ......... $ 279,200 Net Profit (Sales - Costs): ................... $ 140,800 As can be seen from the above table, factoring helped BSP Inc. increase profits substantially from $ 100,000 to $ 140,800 - an increase of 40%. BSP Inc. puts on a more solid financial footing, preparing for growth. In addition, the cost impact of factoring on the bottom line was minimal, as it is easily absorbed by the additional business, showing that factoring was paid for directly by the development.
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