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The Drawbacks People consider discount a small cost of doing business. A four-percent discount for a 30-day invoice is common. Compared with problem of not having cash when you need it to operate, four-percent discount is negligible. Look at factor's discount as though your business had offered customer a discount for paying cash. It works out same.
Companies consider discount same way they treat a sales price: It is simply cost of generating cash flow, much like discounting merchandise is cost of generating sales.
Factoring is a cash flow tool used by a variety of businesses, not just those who are small or struggling. Many companies factor to reduce overhead of their own accounting department. Others use factoring to generate cash, which can be used to expand marketing efforts and increase production.
Why Factoring Appeals to Start-Up Factoring is especially appealing to young and rapidly growing companies. Since process shortens their business cycle, these businesses can grow faster. The ability 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 discount is considered.
Factoring vs. Bank Loans So, why not simply go over to friendly banker for a loan to alleviate cash flow problems? A loan can be difficult if not impossible to receive, especially for a young, high-growth operation, because bankers are not expected to decrease lending restrictions soon. The relationships between businesses and their bankers are not as strong or as dependable as they used to be.
The impact of a loan is much different than that of factoring process on a business. A loan places a debt on your business balance sheet, which costs you interest. By contrast, factoring puts money in bank without creation of any obligation. Frequently, factoring discount will be less than current loan interest rate.
Loans are largely dependent on borrower's financial soundness, whereas factoring is more interested in soundness of client's customers and not client's business itself. This is a real plus for new businesses without established track records.
There are many situations where factoring can help a business meet its cash flow needs. It provides a continuing source of operating capital without incurring debt, which can result in growth opportunities that dramatically increase bottom line. Virtually any business can benefit from factoring as part of its overall operating philosophy.
Every good businessperson must understand concept and benefits of factoring in order to operate as profitably as possible. The following chart can help you understand differences between factoring and other sources of funding.
For more information on factoring and other non-traditional ways to obtain funding, contact Fred Coutts at (206) 364-9613 or Fred@FredCoutts.com. Please visit my website at http://www.FredCoutts.com for more information on powerful funding programs without going through a bank
Fred Coutts, CPA, CMA.
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