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Its true - Factoring is more expensive than traditional sources of bank finance. But like anything that commands a higher price there are usually added value benefits. Factoring has many such added value benefits when compared to a traditional bank overdraft.
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About the Author: Tim Lea is the co-author of the book "A Guide To Factoring and Invoice Discounting: The New Bankers."
He has spent 20 years within the Cash Flow Finance industry, as both a lender and a broker and is the Managing Partner of Cash Stream Financial, an independent commercial finance broker specilaising in Factoring, Invoice Discounting and Inventory Finance. |
Before we go any further ask yourself 3 questions:
1) Do you have an expanding business?
2) Is your working capital currently secured by Real Estate?
3) Is your overdraft insufficient for the needs of your business?
Like the majority of small and medium sized enterprises you have probably answered yes to at least two of the above questions. So let's consider why so many companies have considered it worthwhile paying more by Factoring their invoices.......
1) Your overdraft is fixed
With any business expansion your sales are growing and so is your need for working capital. You need additional stock, additional staff, and your own customers treat you like a bank - and why not - after all you don't charge them interest or take security!! You are probably owed a lot of money right now - and the more you expand the more money is owed to you!
But your overdraft is fixed. This is because it is usually secured against a fixed asset - your real estate. The problem is that the more you expand, the more likely you will regularly hit your overdraft limit - and get calls from your bank manager; but as your business expands it needs more cash to fund its growth.
2) Factoring Expands With You
Factoring, on the other hand, grows directly in line with your sales. The more sales you make, the more the cash grows with you. You simply :
1) Raise your customer invoice
2) Send a copy to the factor
3) Get up to 90% against the value of the invoice usually within 24 hours (The other 10% is returned when the customer pays)
Factoring vs The Bank Ovrdraft .
3) So why is Factoring more expensive than bank overdrafts?
Factoring Companies are invoice specialists. They understand the risks associated with invoices and by monitoring them closely they can maximise the funds they can make available against them. In most cases, they:
a) Undertake credit checks on your customers
b) Chase your customers for you (not with confidential factoring)
c) Provide credit insurance against your customers going into liquidation/bankruptcy.
d) They also undertake their own due diligence - e.g. to ensure goods have been delivered.
As a result, there are additional costs in managing those risks - but the benefit to you is that you get access to more cash without the need to put up real estate security.
So whilst Factoring is more expensive it can provide you with the additional cash your business needs to expand, which would not be available by means of a traditional overdraft, whilst at the same time giving you peace of mind that your personal assets are not being used to fund your business.
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About the author: Tim Lea has specialised in factoring and invoice discounting for the past 20 years and is a published author on the subject of factoring and invoice discounting. He is a partner of Cash Stream Financial (www.cashstream.com.au), who are specialists in raising factoring and inventory finance. You have full permission to reprint this article provided this resource box is kept unchanged
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