Accounts receivable financing, again accepted as factoring, is a able financial tool that has fueled the advance and accomplishment of a figure of companies.
Factoring enables companies to capitalize on their unpaid receivables by selling them to a factoring company for immediate payment. With factoring, companies
immediately amuse paid for their invoiced assignment from the factoring finance company, while the factoring company waits to be paid by the customers. Factoring
strengthens a bag’ cash position by shortening the age to amuse invoices paid to 48 hours and providing the needed funds to accommodated current expenses and
target advanced opportunities.
As opposed to loans and lines of credit that crave that the client accept tangible assets and able financials, factoring relies added heavily on the
financial strength of the clients’ customer. This is a critical aspect,since abounding advanced and baby businesses accomplish not accommodated the financial criteria of traditional
lending institutions. However, abounding baby businesses accept a roster of financially able customers that can be leveraged. Factoring empowers businesses to
capitalize on their customer list, and provides them with a tool to transform a-1 receivables into immediate cash, without generating debt. Since
Factoring is not a loan, it is an epitome financial product for the following:
o Advanced and emerging businesses including baby and at ease businesses, consultants and solo-preneurs.
o Businesses with financially able customers
o Businesses that are preparing to abound significantly
o Bag with intangible assets (e.g. consultants)
o Businesses that accomplish not appetite to booty a loan
An supplementary statement of factoring is that the agency usually assumes allotment of the clients’ credit risk for the customer. This means that if the customer
becomes financially insolvent due to bankruptcy and does not pament the invoice, the agency will assume the loss. This is a critical service for baby companies
who may not be able to afford the bankruptcy of a customer.
The costs of a factoring transaction – again accepted as the discount – vary based on a figure of variables such as the financial strength of the customer and
the amount being factored. Generally, the discount is a percentage of the invoice’s face amount that increases with age until the invoice gets paid. Baby
businesses, those that accept between $20,000 and $300,000 in yearly revenues, can expect to pament a discount percentage of about 2% for every ten (10) days that the
invoice remains unpaid. Businesses with factorable revenues in excess of $300,000 can expect lower discount rates.
Factoring at Assignment: Bag Services and Products, Inc. Position Study
Bag Services and Products, Inc. (BSP, Inc.) is a baby fictional company, which provides bag consulting and equipment to local companies. It has
$300,000 of annual revenues and during the former year BSP Inc. has enjoyed cogent sales advance. Although most bag owners would be actual blessed to
administer such a company, Jane Sullivan, BSP Inc’s president, is actual worried about her company’s financial position.
Most of BSP Inc.’s customers are ample companies with a acceptable reputation for always paying their invoices. However they always booty between 30 to 45 days to
pament them. BSP Inc., however, needs to pament their employees every two weeks and their vendors every four weeks. This discrepancy between the age that
customers pament their bills and the age BSP Inc. needs to pament their employees and vendors has created cash flow problems in the former. Furthermore, these cash
flow problems accept already caused Jane to delay payroll twice this year and accept placed her trade (vendor) credit in jeopardy multiple times. This has again
caused her to pass on a figure of cogent bag opportunities as she was unsure of the company’s financial adeptness to hire and pament for supplementary
staffers. Unfortunately, BSP Inc. did not accept a ample enough financial cushion in the bank to afford paying employees while waiting for 45 days advanced clients
to pament their invoices.
The following table provides an overview of BSP, Inc’s current financial position.
Bag Services and Products, Inc (without financing)
Yearly sales: $300,000
Absent advanced sales opportunities: Foreigner
Total Sales: $300,000
Variable Costs (60% of Sales): $180,000
Fixed Costs (Rent, phones, etc): $20,000
Total Costs: $200,000
Profit (Sales – Costs): $100,000
Although the company’s prospects arise abundant, Jane may accept to stall her company’s advance until she builds a ample enough cash cushion at the bank to
finance her company’s advance. After careful consideration, Jane decided that a factoring line of working chief could advice strengthen her company’s
financial position. Furthermore, factoring her invoices would enable BSP Inc. to booty on advanced customers and abide growing, alive that she could
capitalize on her slow paying customers. BSP Inc.’s financing agreement will accommodate the company with an advance of 70% of her invoiced services. This means
that the company can amuse 70% of the face amount of the factored invoices within 24 to 48 hours of submitting them to the agency. The remaining 30% of the
funds, less the factoring fees, will be quickly rebated as soon as the customer pays their invoice.This line of working chief strengthened the company’s
financial position and bank statement, enabling Jane to pament for advanced employees to service advanced contracts. Jane again decided to statement the extra chief to pament her
vendors early, obtaining abrupt payment discounts and helping to lessen the cost of factoring.
BSP Inc. customers pament their invoices within 30 days of receiving. The discount (factoring charge) for these invoices is 6%. Every age an invoice is paid, the
agency rebates BSP Inc. the remaining 30% that was not advanced less the factoring charge. This means that once the transaction is completed, the agency rebates
24% (30% – 6%) to BSP Inc. Thanks to the factoring line of working chief, Jane was again to secure an supplementary $120,000 worth of bag, bringing her
annual revenues to $420,000.
The following table shows BSP Inc.’s financial position a year after using factoring.
Bag Services and Products (with factoring)
Existing Sales: $300,000
Advanced Sales: $120,000 (factored)
Total Sales: $420,000
Variable Costs (60% of Sales): $252,000
Fixed Costs (Rent, phones, etc.): $20,000
Cost of Factoring (6% of $120,000): $7,200
Total Costs: $279,200
Grasp Profit (Sales – Costs): $140,800
As can be seen from the above table, factoring helped BSP Inc. access profits substantially from $100,000 to $140,800 – a 40% access. It placed BSP Inc.
on a added stable financial footing, priming it for advance. Furthermore, the cost appulse of factoring on the bottom line was minimal, as it was easily
absorbed by the supplementary bag, showing that factoring was paid for directly by the advance.
About the author:
About Commercial Chief, LLC and Marco Terry
Commercial Chief, LLC is a leading commercial finance company that specializes in providing working chief buttoned up factoring to baby businesses. For added advice or a chargeless consultation, please appointment our interlacing sites at or or call us at (786) 206 4722.
Originall posted February 17, 2012