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Growing Your Expedite Business: Factoring Fundamentals
Fergies's Fast Freight is a new expediting business, but growing rapidly. Fergie has been able to secure some lucrative local accounts and he's been able to keep his small fleet of Owner/Operators busy.
Everything seems to be flowing smoothly...except his cash. His drivers have this nasty habit of expecting weekly settlements on time, there's the hefty phone bill every month and the rent on his "global" headquarters, and all of his other creditors who expect to be paid on time.
Cash flow is Fergie's problem; it's not flowing fast enough. His customers pay their bills, but usually in 30, 45 or 60 days. Fergie realizes that if he had the cash earlier, making the payroll and paying his bills wouldn't be the hassle that he was experiencing on a daily basis.
Fergie decided to try a factoring service.
A factoring company purchases a business's commercial accounts receivable, then advances the cash to fund the business. It's that simple. This enables the business to have immediate access to the cash, without needing to wait 30 to 60 days to be paid by its customer.
Advances up to 95% of the invoice face value are usually available, and credit limits from $10,000 to $1,000,000 make factoring a solid alternative for small and medium-sized businesses alike.
Since Fergie's been using the factoring service, he's eliminated many of the daily/monthly cash flow problems that plagued his business before, and has even been able to grow his company. His fleet is happy, his creditors are happy and Fergie is happy.
Factoring benefits to a business owner.
While factoring can certainly benefit businesses with cash flow needs, there are many reasons a business owner should consider factoring.
1. Elimination of bad debt. A non-recourse factor will assume the risk of bad debt, thus eliminating this expense from the business' income statement.
2. Invoice processing. Factors handle much of the work associated with processing invoices, including posting invoices to a computer system, depositing checks, entering payments in the computer and producing regular reports.
3. Offer credit terms to customers. With factoring, businesses can offer credit terms (or extended credit terms) to their customers without negatively impacting their cash flow. The business can grow by making it easier for customers to buy from them.
4. Unlimited capital. Factoring is the only source of financing that grows with sales. As sales increase, more money becomes immediately available. This allows the business to constantly be able to meet increasing demand.
5. Take advantage of early payment discounts and volume discounts. If a business can save 2 - 5% of their raw materials cost because they have the cash to pay within ten days, this significantly reduces the true cost of factoring. Coupled with the ability to make volume purchase with the cash advances, they will likely save even more money.
6. Stop offering early payment discounts to customers. Since companies that factor receive their money immediately, they don't need to offer early payment discounts. Factoring will save every dollar in discounts that customers were taking. By realizing this savings and taking advantage of the early payment and volume purchase discounts, the business owner may be able to offset the cost of factoring.
7. Don't give up equity. The business owner does not have to give up any equity in the company (as is usually required with venture capital) or take on any partners, with factoring.
8. Don't incur additional any debt. Factoring is not a loan and therefore the business is not incurring any additional debt.
9. Detailed management reports. The factor provides detailed management reports allowing for better management of cash flow.
10. No geographical limits. A factor can work with a client in any part of the country and that client can have customers all over the country.
Even though the process is as old as colonial America, factoring is alive and well today and continues to provide small and medium-sized companies the access they need to working capital.
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