Every so often we get a prospect that wants to extend their current business financing with factoring. For example, the business may have a line of credit that is fully used and may need an additional factoring facility to help with cash flow. Can this situation work?

It depends. Most business loans or lines of credit tend to be secured by accounts receivable. This means that the lending institution is using the accounts receivable (invoices) as collateral that can be used to cover any loan or line of  credit defaults. As you can imagine, a factoring company would not want to finance invoices that are held as collateral by another institution, since the whole factoring transaction hinges on the factoring company being paid by your customer. Because of this, a factoring company will only consider providing factoring to a company that has a business loan or line of credit if at least one of these is true:

• The business loan does not have the accounts receivable (invoices) listed as collateral
• The bank is willing to subordinate their position on the accounts receivable in favor of the factoring company
• The bank loan/line of credit is paid off and closed

As you can imagine, most banks are not willing to part with their position on the invoices since they represent some of the best collateral that your company has. This makes combining invoice factoring and conventional bank financing difficult.

One of the ramifications of the current real estate bust is that it has increased demand for property preservation services.  Usually, a bank is responsible for the upkeep and maintenance of properties that are repossessed. Banks and real estate companies usually outsource these tasks to property preservation companies who make sure that these properties are kept in good condition so that they can be sold at a later time.

Most property preservation companies have staff that handles all maintenance tasks. They also have a steady supply of materials that are used to fix up properties. Repairs can range from simple things,  such as pain jobs, to more complex plumbing and electricity jobs. Most banks and real estate companies do no pay for these services in advance though. Rather, they ask to be billed on net 30 to net 40 terms. This means that the property preservation company is responsible for paying employees and suppliers while waiting to get paid by the bank. The problem – few business owners can afford to wait.

There are a few ways to deal with this problem. You could delay paying vendors or perhaps you could try and build a cash reserve to cover payments while you wait to get paid. A better solution may be to get business financing to help cover your obligations. One solution that works well for this problem and integrates well with the industry is invoice factoring financing. It provides the equivalent of a quick payment, eliminating that 30 day wait to get paid and smoothing your cash flow. It works by using an intermediary financing company that stands between your company and your customer. The factoring company provides you with an advance against your invoice and then waits to get paid by your customer. Once your customer pays the invoice the transaction is settled and closed.

Generally, transaction are structured as follows:

1. You sell the invoice to the factoring company
2. The factoring company advances 80% as a 1st installment
3. Your customer pays 30 to 40 days later
4. The factoring company remits the remaining 20%, less a service fee as a 2nd installment

One advantage of invoice factoring financing is that it’s fairly easy to get. The most important requirement is that you have invoices from commercially credit worthy companies (such as banks), because they represent the collateral of the transaction. Additionally, your company needs to be free of judgements and liens.

Although the recession has been technically over for a while, finding business financing remains almost as challenging as it was during the worst part of it. This is due to a combination of lending institutions being in bad financial shape and lenders being more conservative in their lending. In the end, they only provide business loans to companies that are in pristine shape. That means that companies need to have two to three years of positive financial statements, have strong cash flows, strong assets and a seasoned management team. However, few companies have survived the recession unscathed and most can’t meet these requirements. If a company is viable but has a less than perfect past – what are their options?

Most companies that look for financing tend to have a similar problem – poor cash flow. This problem starts (or worsens) when customers start paying their invoices late or asking for longer payment terms. Invoices that used to be paid in 15 to 20 days, now get paid in 30 to 40 days. Some customers may take up to 60 days to pay an invoice. In the meantime, the company still needs to cover all their current expenses.

This can put a company in a precarious position, especially if it does not have strong cash reserves. They risk missing a critical supplier payment or worse, missing payroll. One way to fix this problem without using a business loan is to use invoice factoring.

Invoice factoring provides an advance for slow paying invoices. This provides the company with the necessary funds to meet supplier payments and other expenses. More important, it stabilizes cash flow by providing predictable invoice payments, allowing the company owner to focus on growing the business.

When cash flow is tight, owners fret over taking on new business and adding customers because they are unsure if they will be able to cover expenses until the client pays. Invoice factoring solves this problem – allowing the business to take on new clients and grow.

Integrating factoring to company is fairly easy. Usually, the factoring company will give you an advance of up to 85% on your invoice as soon as the work is completed. The remaining funds, less the fee, are rebated when your customer actually pays.

Qualifying for factoring is much easier than qualifying for other types of financing. The most important requirement to qualify is to do business with customers that have good commercial credit. Aside from that, your company needs to be free of liens, judgments and tax problems.

A moderate percentage of factoring prospects inquire about using factoring in conjunction with another type of business financing solution – like a business loan, line of credit or equipment leasing arrangement. Can these services work together? It depends. They can if the collateral agreements allow them to.

First, let’s look at a conventional factoring agreement. In most factoring agreements you sell your invoice (or the rights to it) to a factoring company.  But an invoice is just a piece of paper – how can the factoring company secure it’s position when you sell it to them? They do so by filing a UCC lien, which grants them first rights on the asset (the invoice). This also helps ensure that the same collateral is not sold to many companies at the same time. In general, liens work by order of filing, so whoever files first is in “1st position” and has 1st rights. This is important because factoring companies need to be in 1st position with respect to the invoices that they buy.

Now, when you have a business loan, the bank or business finance company files a lien. This lien commonly covers accounts receivables (aka invoices) ensuring that the bank is in 1st position with respect to these assets. Why do banks include accounts receivables in their filing? Because they are good assets and near cash. This is why a company with a business loan can’t get an  invoice factoring line – the factoring company wont be able to get a 1st position lien against accounts receivables.

The only solution is to ask the bank to subordinate their position against the receivables. This may work if the bank is over-collateralized – but in reality it seldom works. Banking institutions need the accounts receivable collateral to secure their position.

The pallet manufacturing and distribution industry is very competitive. Whether you are manufacturing pallets, distributing them or both – managing income and expenses can be very challenging. You have to work with suppliers that demand quick or immediate payments. At the same time, your clients want to pay invoices in 30 to 60 days. Pallet manufacturing and distribution companies that cannot manage their income and expenses soon find themselves with cash flow problems.

Problems usually start when a client starts taking a little longer to pay their invoices, forcing you to dip into capital or to delay payments to your owns suppliers. If left unchecked, this situation can snowball into a major problem that threatens your company.

There are a few ways to manage this problem. One alternative is to try and negotiate delayed payments to your suppliers while trying to obtain quicker payments from your clients. Although worth a try, this type of juggling seldom works for the long term. A second alternative is to get business financing from an institution.
This can be a good alternative for larger companies who can show substantial assets and provide solid financial statements. Although qualifying for a business loan is not easy – business loans are usually available to well managed larger firms. But what can small or midsized firms do?

A better alternative may be to use factoring financing. Invoice factoring solves the dilemma of slow paying clients by providing an advance against their invoices. This quick payment provides the firm with the funds they need to meet expenses and grow the business.

Factoring has a number of benefits. It provides the company with stable and predictable cash flow, which smooths operations and planning. Furthermore, accounts receivable factoring (as it’s commonly called) is fairly easy to obtain. The biggest requirement is that the invoices you finance have to be from credit worthy commercial clients. Additionally, your company needs to be free from legal or tax problems or encumbrances.

Qualifying for factoring is relatively easy which makes it an ideal solution for small and medium sized clients whose biggest problem is that they cannot afford to wait to get paid by clients.

The field of Information technology (IT) is full of small and medium sized companies that are vying for customers and for position. Surviving in this cutthroat industry requires that owners manage their businesses, especially their cash flow, very carefully.

The IT industry is known for having heavy expenses. Payrolls tend to be high since technical employees command high wages. Also, if the company also resells hardware, if not unusual for equipment and inventory expenses to grow quickly, especially if the firm is involved in large projects.

On the revenue side, clients usually pay their invoices in 30 to 60 days. Because of this, the firm must usually cover its overhead and other expenses for a time before being able to recoup their investment. Waiting to be paid can be a challenge for many small or medium sized IT firms. Furthermore, few small firms have enough capital to handle payment delays. That means that the firm could be at risk of missing supplier or employee payments, if a few clients delay their invoice payments.

If the company has funds in the bank, a few late invoices will not affect things at all. However, if the firm is running lean, there are only three things you can do. You can delay your supplier payments until you get paid, you can try and arrange for quicker payment or you can get business financing.

Negotiating payment schedules with clients and suppliers can be tricky and seldom produces predictable results. Most small and medium sized firms will probably be better of getting formal financing. One emerging financing solution called factoring is ideal for this type of situation. Invoice factoring eliminates having to wait for your clients to pay by providing you with a funding advance on your invoices. You get stable and predictable cash flow, which enables you to focus on running your company, rather than on collecting invoices. The transaction is settled with the factoring company once your client pays the invoice.

Invoice factoring is relatively easy to qualify for and available to small and medium sized businesses. The biggest requirements to qualify are that your clients must have good commercial credit scores and your business must be free of encumbrances.

Factoring can be a great solution for small and midsized IT companies that can’t afford to wait 30 to 60 days to get paid by their clients.

Although there are many methods to finance and capitalize a company, the financing transaction is usually structured and secured in one of two ways. Either your put up collateral as security or you give up some ownership of your company (equity). Both methods have their benefits and drawbacks. One of the major benefits of using collateral instead of giving up equity is that you retain ownership and control of the business. This can be very important for business owners who want to retain their independence. When you sell equity, the buyers become your new partners – for better or for worse.

Most small and medium sized companies look for financing because they have cash flow problem. Although you can fix these problems by selling equity and recapitalizing the company – it’s not always the easiest solution.

One business financing alternative is to get a business loan. Although business loans are a popular tool to finance a company – they can be hard to get. The current lending environment is very difficult and institutions are only extending loans to very low risk ventures. To qualify, most companies need to have strong financial statements, multiyear profits, seasoned management, substantial collateral and good growth potential. Few companies meet these criteria, especially small and midsized companies.

If the cash flow problems are caused by slow paying clients – rather than by low sales – invoice factoring may be the right solution. Invoice factoring financing is a simple solution that provides a funds advance on your slow paying invoices. It plugs the cash flow gap, providing the money you need to pay suppliers, employees and other business costs. More importantly, it smooths out cash flow, providing predictability and allowing the business owner to focus on other tasks.

Most invoice factoring transactions are structured as two advances. The first payment is given to you as soon as you invoice your client. It’s usually 80% of the invoice. The second advance, which is 20% less the financing fee, is given once your client actually pays the invoice.

One of the advantages of invoice financing is that is easier to get than other forms of financing. If your business is free of liens and encumbrances and you invoice credit worthy commercial clients, you have a good chance of qualifying.

Most midsized companies have always been in a peculiar position when they seek financing. Often times they are too big to qualify for most small business financing packages, and too small to qualify with large financial institutions. Although many providers focus on “middle market” companies, finding the right financing can be a complex endeavor. This has become even more challenging in the current economic environment which strongly discourages institutions form risk taking.

Most midsized companies either need capital for new projects or need funding to smooth out cash flow. Their main focus tends to be on using lines of credit as a way to handle their cash flow problems. Unfortunately, the underwriting standards for a line of credit are similar to those of a conventional business loan. Most institutions require that the company have solid financial statements, good growth prospects and a well seasoned management team. And even if you meet these requirements, success is not guaranteed.

If your company has cash flow problems, there is an alternative source of funding your should consider. It’s called factoring. It’s an ideal solution if your business is affected by customers that pay their invoices in 30 to 90 day but you can’t afford to wait. This problem is very common and it forces companies to dip into reserves (if you have them) while they way to get paid.

Invoice factoring provides a simple an elegant solution to this cash flow problem. It gives your company an advance on invoices from credit worthy customers, providing quick funds that can be used to pay expenses and pursue new opportunities. The transaction is settled once your customers pays for the invoice in full.

Most factoring transactions are structured with two payments. The first one covers about 80% of the invoice and is provided soon after invoicing. The second one is for the remaining 20% (less the factoring fees) and is provided after your clients pays the invoice. Factoring fees vary and are determined by the size of your invoices, your sales and the credit quality of your clients. In most cases qualifying for invoice factoring is a lot easier than qualifying for business loans.

One advantage of factoring is that it is tied to your sales – and it grows with your sales. This makes it an ideal solution for midsized companies that need flexible financing to grow.

Companies that sell to commercial and government customers almost always get paid for their services on net 30 to net 60 day terms. This means that they have to wait up to 60 days from the time of invoicing to be able to collect a payment.  Most firms cover expense during this delay by using their cash reserves or relying on a bank line of credit.

This strategy tends to work well, unless you have limited cash reserves and are unable to get a line of credit. Institutions underwrite their lines of credit much like business loans and other business financing products. They require two or three years worth of financial reports about your company. They require that the company and the owners have substantial assets. And, they require that all the records be spotless.

If your company cannot meet the institutions funding criteria you will usually be out of luck, especially in the current economic environment. Conventional underwriting standards are very strict. However, there is an unconventional approach to financing your business that works for many industries.

As mentioned earlier, most companies that have cash flow problems have them because they can’t afford to wait 30 or 60 days to get paid by clients. This gap can be covered using invoice factoring. Invoice factoring provides an funds advance on your slow paying invoices giving your company the necessary liquidity to cover expenses while waiting to get paid. One advantage of factoring invoices over other solutions is that you can leverage the credit quality of your clients to your advantage. In an invoice factoring transaction, the funding company buys the invoice at a discount, with the expectation it will be paid in 30 to 90 days.  If your clients have good commercial credit, the funding company will likely buy the invoice.  This feature enables small companies whose biggest asset is a solid roster of clients to use invoice financing.

A second advantage of invoice factoring is that it grows with your sales. Your funding line will usually be determined by the size of your invoices and the credit quality of your clients. This funding flexibility enables small companies with big potential to grow organically.

Corporate cash flow nightmares are more common than most people think. Thanks to the current uncertainty about the economy, many companies have started delaying payments to their suppliers. They still pay, but they pay later. Two years ago, invoices usually got paid in 30 to 45 days. Now they may take 60 or even 70 days to pay. Large customers delay payments for one single reason – it helps their own cash flow. They get to use the cash, that was destined to pay your invoices, for 15 or 30 more days. Think of it as an interest free short term loan that you make to them.

Having clients that pay beyond terms can create a cash flow nightmare. Many business owners run their business very tightly, with little room for error. It only takes a few late payments to throw operations into a tail spin. When this happens, business owners compensate by starting to pay their own bills late. This can easily get out of hand and start affecting the ability to meet payroll. If you are at risk of missing payroll you know you have a nightmare in your hands.

Since making clients pay quickly is no usually an option, there are two possible solutions. One solution is to start building a reserve fund ahead of time. This ensures you will always have money to cover all expenses. But this comes at a cost because money in the reserve fund can’t be used in other parts of the business. And, few companies have the resources to build the fund.

A second alternative is to look for business financing. This will usually solve your problem, if you get the right type of financing at the right time. Unfortunately, asking for a business loan when you are in the middle of a cash flow disaster seldom works. Most financial institutions will only give business loans to companies that have solid financial records.

A better solution may be to use invoice factoring, which provides an advanced payment for your invoices. Factoring covers your customers payment gap and provides the liquidity you need to operate your business. Furthermore, most factoring companies are used to working with clients that have financial problems or are turning around their business, so few will be too concerned if your financial statements show some problems.

Factoring is a very specific solution, it helps bridge the gap between delivery of services and payment, and can help stabilize cash flow. It’s an ideal solution for companies whose biggest problem is slow paying clients.

Finding business financing for a company has always been a challenge. to complicate matters, the current economic environment has made it a nearly impossible task to find investors. Nowadays, investors are looking for safe investments, and unfortunately, small and medium sized companies are not considered safe investments.

Although investor financing has many benefits, you should also consider alternatives that don’t require that you give up ownership in the company. One common way to finance a company is to use a business loan. Although business loans are well known, they can be difficult to get because they have to go through a strict underwriting process. To qualify for a business loan, most companies need impeccable financial statements, solid assets and a few years of positive operating experience.

One alternative to business loans is factoring financing. This solution specifically helps companies with cash flow problems that arise from slow paying clients. It provides a cash advance against slow paying invoices, enabling your business to cover operating expenses. By reducing the number of days it takes you to get paid, invoice factoring can help free cash flow that can be deployed to new projects and growth opportunities.

One of the advantages of invoice factoring is that it is reasonably easy to obtain. Most factoring companies structure the transaction as a purchase, meaning they buy the invoice from you. Since they are buying the invoice, their biggest concern is the credit quality of your clients. This means that small companies or medium sized companies with a short track record but very solid clients can usually qualify.

Factoring companies buy invoices in two payments. The first payment covers about 80% of the face value of the invoice. Your company gets this very quickly. The second payment covers the remaining 20% of the invoice, less the factors fee. This payment is usually provided shortly after your client pays the invoice in full.

Invoice factoring is a flexible financing solution that can help small and medium sized companies that have cash flow problems.