Finance Factoring Can Help You Row Your Cash Flow Boat Successfully
The business world is a journey into the unknown. It offers lots of opportunities, but its dynamic landscape makes it risky business and it isn't for the faint of heart. Since the only constant is change, for business owners who want to survive and succeed, the key is the ability and willingness to adapt. Take the way companies (small and big) borrow money nowadays for example. Until recently, banks pretty much had the monopoly on borrowing, but new players who offer funding alternatives have emerged.
Say you're a small trucking company making every effort to compete in the margin-hungry business world, grow your company in the shadow of the industry giants, or just to get through the end of the month. Being cash-pressed could literally kill your business. Surviving the mismatch between your expenses and the time it takes to get paid by your customers could mean the difference between failure and success.
But getting cash in hand fast through a bank loan or credit line could be complicated and frustrating. And could take weeks to get approved. Especially if you have a bad credit score or no credit history, lack of collateral, and weak cash flow. However, unless you find fresh grass fast, you'll perish.
What's the answer? For a growing number of small trucking companies, it is the finance factoring. The practice of accounts receivables financing is selling your invoices to a third-party financial company (commonly known as 'factor') at a discount rate of their face value.
For many small businesses, finance factoring has become the go-to tool for cash flow management as they are no longer forced to dip into other sources of cash all because their customers haven't paid on time. Plus, the factoring setup and approval process are quick and unlike a traditional bank loan, it isn't based on your credit score, financial statements, tax returns, whether you have physical property or any other asset to secure the loan, and profitability. Moreover, it doesn't add to the debt on your balance sheet.
Having a positive cash flow is crucial for business survival and late payments could suffocate your business. Unfortunately, the business world is far from perfect and the average waiting period for payments on invoices is about 70 days. This could put your company in a very difficult position. By leveraging your accounts receivables at a discount to the face value, you receive the funds needed to run your business (fuel cost, truck repair, and maintenance, insurance premiums, permits, driver wages, utility expenses, office expenses, etc.).
Factoring fee covers factor's overhead (processing invoices and collecting from your clients) and it typically ranges from 1-5%. The factoring fee depends on the amount of the invoices being factored, your customers' creditworthiness and factor's credit risk. However, the advantage of having instant access to the funds which allows you to run, improve and grow your business outruns the cost of the discount fee.
Aside from getting the working capital immediately (in as little as 48 hours), you no longer have to worry about handling collections from your customers for work completed. Instead, you can focus your time on managing your business. Having a plan in place to address cash flow surprises can help you avoid potential pitfalls that can seriously jeopardize the health of your freight transportation business.
Banking on income before receiving the payment could create a cash flow crunch which could seriously harm your business. Eliminating the gap between raising invoices and seeing them paid is key to good cash flow management. In other words, finance factoring can not only help you stay in control but also improve your company's bottom line.
The great thing about people wanting to start a business today is that the online world grants them opportunities that would have been unthinkable as little as twenty years ago. If you have ambitions to make it work in the world of entrepreneurship, there is plenty you can do with a little effort to bring a business online
At some point in time, everyone of us feels the need to properly manage our own financial needs.