Creative Financing for your Burning Cash Flow Issue

Small businesses are said to be the backbone of the US economy. Though, the prevalent industrial and financial state in the country is giving a different picture. According to the reports of the National Small Business Association, one out of four businesses lacks the working capital that is essential to take their businesses forward. These organizations are struggling to get funding since banks have taken a more conservative approach while lending finances to small businesses. Even though the market is expanding and generating more opportunities, the growth process of small businesses has become limited. In this context, invoice factoring companies can easily replace banks for providing a practical and alternative financing option.

Though demand for small business financing is quite high, its availability is falling sharply. Statistics show that in December 2012, the percentage of loans approved for small businesses was below 15%**. Fortunately, there is an alternative option called factoring, which small business owners can avail to meet their immediate funding needs. The factoring process involves a factoring company buying a business’s account receivables or invoices. The company then pays an advance between 40% and 90%. Only around 3.0% percent of small business owners are aware of factoring as a financing option. Other companies that capitalize on factoring opportunities are sustaining and growing their businesses.

Let’s have an example on how factoring works. Assume your business has $200,000 as accounts receivables, and the invoices’ aging are for 15, 30, 45 days. It means you won’t receive payment from your customers before this timer. Rather, customers often request to increase payment terms, and that will delay the cash flow further. In between, you have to pay salaries to your staff, pay your suppliers and you may have to invest in new projects. So, to avoid a cash crunch, you decide to have services of an invoice factoring company. After verifying the invoice amount and aging schedule, the company approves 80% financing as an advance, less a discount fee of 3.5%. The calculations would be as follows:

Amount of Invoice Factored:                           $200,000

Advance Amount:                                            $160,000

(80% of $200,000)

Less: Discount Fee @3.5%:                            (-) $7,000

(3.5% of $200,000)


Net Advance Received by You:                         $153,000

Balance Amount to Receive:                             $40,000

(20% of $200,000)


As shown in the above example, the factoring company will pay the balance amount of $40,000 to you once it collects payment from your customers. This will then complete the factoring transaction.


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