How to Handle a Cash Shortage With Invoice Factoring

Most companies experience cash shortages at one time or another. This article will explain how to address a common problem that causes shortages and will also suggest some strategies to del with them. However, this article should not replace the advice of a qualified professional. If your company has serious cash flow problems, you should consider speaking to a financial specialist immediately because waiting seldom helps.
Let's look at the most common cash flow problem. In corporate sales it's common to give customers 30 days to pay. Thanks to the economy, most customers have taken longer to pay their invoices. Some can take as long as 60 days to pay. This leaves companies waiting up to two months for payment. In the meantime, the company needs to cover it's expenses regularly. You need to pay rent, vendors and employees. So these payments come out of your reserves, until the invoices pay. The problems start when your reserves dwindle due to growth or slow paying customers.
There are two ways to protect your reserves. One way is to delay expenses so that they come close to matching your invoice payment cycle. The other one is to accelerate invoice payments. Ideally, you want to take both approaches to achieve the most optimal solution.
The most common way to delay expenses is to speak to your own vendors and seek 30 to 60 day terms yourself. If you have been a good client to them, many will be happy to oblige in order to keep your business. However, if you renegotiate payment terms, be sure that you can meet the payments, otherwise you risk losing your vendors. One thing you should avoid at all costs is missing payroll or not paying taxes. If you are at risk of missing payroll, seek the help of an advisor as it's a sure sign your company is in serious trouble.
There are a couple ways you can accelerate your invoice payment cycle. One is to speak to customers and offer them a discount if they pay quickly. It's a common industry practice to offer a 2% discount to customers that pay in 10 days or less. If that approach is not sufficient, you should consider factoring your invoices. Invoice factoring accelerates your revenues by using a financial intermediary who advances you funds against your slow paying invoices. The factoring company holds the invoice until maturity and settles the transaction with your company once the customer pays the invoice in full. The factoring fee is based on the factored volume, the credit quality of the invoices and other variables.
One advantage of factoring is that it's easier to obtain than conventional business financing. The impost important requirement to qualify is to have customers with good commercial Credit ratings. It also works well for company whose assets are limited to good quality invoices from credit worthy customers.
Most cash flow shortages require a comprehensive approach of managing both expenses and income in only to ensure the company has sufficient liquidity to cover obligations. Factoring is a tool that can be used to help in this effort.

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Guide Book To Invoice Factoring

At times factoring is mistaken to be a sort of discounting term used in financial transactions. But it is far from that. Factoring is when as a business, you sell your accounts receivables or invoices to a third party at a discount. The title of a factor is given to the concerned third party. And this concept is known by different names mainly invoice factoring, factoring charges or just factoring. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller. Factoring is generally done to raise capital. It is a three party transaction that involves the seller of the accounts that is the person that is trying to raise the capital, the third party to whom it is being sold or the factor and the customer of the seller. Also factoring doesn't create any sort of liability on the balance sheets and contrary to popular opinion it is not really an expensive way of cash lubrication.
Textile industry is one such industry where invoice factoring is the method used for cash management. There is a need for generation of cash as there are longer credit cycles in this sector.
Dynamics involved in factoring
What next once the invoices are sold to the factor. The factor acquires all rights over the invoices be it for goods sold or for services rendered. Hence it's an indication that the factor might have to bear the losses in case if the customer doesn't pay up then.
Some common reasons for invoice factoring
1. To whip up instant cash flow.
2. To fully utilize or increase business capacity or infrastructure.
3. To meet future business needs
How many different types of factoring are there?
Factoring is of two kinds. Each of the two types is explained below:
1. Advance Factoring: The factor pays up to 80% of the accounts receivables in advance to the seller and the remaining on receiving the total amount from the customer of the seller.
2. Maturity Factoring: There is no advance payment. The factor pays the seller the full amount on a date that is closer to the actual payment date by the customer of the seller.
It is advisable to be partial with advance factoring as it has the advantage of time. Most of the times people come into cash.
Who pays for the gap between actual receivables and their selling price?
Most businesses take this very cautiously. The gap goes on minimizing between realizing money from pending receivables and raising new invoices. This result in a major benefit and the seller of the accounts can pursue other cash generating activities in the meanwhile. Mostly seller gets nearly close to 80 percent to 90 percent of the accounts.
Invoice factoring due to hike in the cash flow in business is highly preferred these days. In spite of this there are a lot of misconceptions floating around it. However to actually leverage this cash benefit and time benefit, thus involve the financial advisor. Look for the advisor online.

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