Trillions of dollars are being transacted daily in the form of paper. This paper is an invoice generated for the exchange of business or service on the promise of payment at some future time. There are two types of transactions, retail and commercial. A retail transaction the customer generally pays for the product at the time of sale. With a commercial transaction goods are typically sold on credit and the buyer doesn't have to pay right away. They are extended a term of 30, 60, or even 90 days to pay.
Offering credit allows has many benefits for businesses. They can remain competitive in their marketplace and it allows time to verify shipment of goods. Usually both transaction types can result in invoices. An invoice is the basis of payment and is now considered a source of collateral for businesses.
Factoring is the purchase of accounts receivables from a business at a discount. Factoring allows businesses to operate more smoothly because they are able to collect money owed immediately by accepting a reduced payment amount from a third party.
In a factoring transaction, a business sells one or more invoices to a factor. A factor is the source of funding that specializes in buy accounts receivables. The steps are relatively simple:
First, the factor advances a certain percentage of the invoice amount to the business
Second, the factor also holds a percentage of the invoice amount on paper as a reserve
Third, the factor assumes the right to receive payment on the invoice
Fourth, the business customer submits payment to the factor
Finally, the factor rebates the business the reserve amount less any fees
Factoring is not a lending service. It is a discounted purchase. Although, many businesses apply for traditional lending, because banks and lending institutions must adhere to very stringent rules and guidelines, they are required to have a certain level of capital or equity in order to lend money. Factors are not subject to the same regulations as banks. Besides that, factors purchase the receivables outright and it is not a loan. It is not uncommon for factors to advance up to 90 percent or more of a business's accounts receivable.
Accounts Receivable Leveraging (ARL)
Factoring is slowly making its way to becoming a practical business practice, but now there is a new way to use this practice to increase, yet, even more options for businesses.
ARL has a broader definition of receivables and the underwriting requirements are much more liberal. The objectives that can be achieved by using ARL range widely, including wealth accumulation, retirement augmentation, estate planning, and asset protection.
All this can be accomplished without changing the present billing practices of a business. An owner may qualify for a loan against receivables for up to 125 percent. This amount is then placed in a tax-deductible product like an annuity or universal life plan. Simple interest is compounded annually and this becomes the retirement income that the principal/owner/partner can enjoy.
Factoring provides businesses with an option to using their receivables to generate cash immediately. This cash flow option is popular among small to mid-sized businesses. Easing the financial crunch is simple when you can use your future payments today!
Kim Harris is a Certified Cash Flow Consultant and Principal of Mega Capital Resources which provide cash flow solutions for small to mid-size businesses and individuals. She is the recipient of the 2005 SBA Women in Business Champion of the Year award. She is a published author and motivational speaker on economic vitality and wealth building strategies. http://www.megacapitalresources.com
