Saturday 31 March 2012

Invoice Factoring as an Alternative Funding Source

By Curt Matsen, CPA


The most difficult time for any organization, big or small, is when the economy is not doing so hot. A slow down, depression or a recession puts more strain on an organization than any other factor. And when the economy is rough, institutions like banks tighten up lending, thus capital is very hard to come by.

An organization needs capital not only to survive, but also to make future plans such as growth expansion. Many existing organizations just want more money so they can buy more product, hire more employees, or even open new destinations.

For a business to raise the capital it needs however, it needs to show a strong asset or borrowing base against which a lender would be willing to lend. A lender must be comfortable that the company borrowing has the strength, or in other words enough assets to be able to cover the carrying cost of the debt as well as the entire debt in the event things don't work out as good as they thought.

But what happens when an organization does not have the borrowing base? That is when receivables financing comes into play. Receivable financing is also referred to as invoice financing, or factoring. It's proper name is accounts receivable financing, wherein the organization sells its receivables to a third party in exchange for immediate capital.

Why would a company sell its receivables? Because invoices are treated as assets on a company's balance sheet. Remember, valuable assets can be sold. A company can sell these assets and raise the cash it needs to grow today.

With enough capital, an organization can take the next move in order to expand. Without this funding, an organization may not be able to survive, let alone thrive.

So how much does financing cost? There is a one time set up fee, and then a small fee on each transaction can cost up to five percent. That said, most companies are charging less now days because of the competition.




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