Compound Profit Blog

Factoring, also referred to as accounts receivable financing, is the process by which a company sells its outstanding invoices or accounts at a discount to a finance company which then assumes the risk associated with the accounts in exchange for immediate cash. In this instance, companies are essentially trading future earnings potential for the ability to immediately obtain cash to finance separate projects or cover different expenses.

The particulars of the financial agreement vary depending on the nature of the account and on the nature of the financing institutions personal policies and guidelines. In most instances, the financing company will charge a 5% fee associated with the proceedings, which, may or may not be less then other comparable financing options. Additionally, every account has a value assigned to it on an individual basis. Basically, the lending institution will assign a higher base value to an account relative to how recently the account has been opened. For many small businesses, financing of this form offers several benefits.

Manage Collections.

Many small businesses lack the resources necessary to properly pursue and manage collections. This form of financing allows companies to continue normal business operations while only suffering a minor loss on specific accounts. Though factoring companies are often uninterested in purchasing accounts greater than 90 days past due, most accounts will qualify for financing.

Free Up Capital.

For companies involved in the production process, a majority of their working capital is connected directly to their inventory levels. In the event that a customer wishes a delayed payment schedule, smaller operations are often left facing extended downtime between the completion of an order and payment collection. Factoring allows companies to minimize downtime while maximizing capital liquidity levels.

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Just what the world needs: another middle-aged man jumping on the social media bandwagon and starting a blog to talk about improving your business through cash flow... right?

Right.

It seems, after beating our collective heads against many walls in Richmond, Va and pounding our chests to virtually anyone who will listen, the message still hasn't been internalized by many small business owners. There is help out there for your short term cash flow needs and it doesn't necessarily have to come from the bank. It often exists in the unlocked potential of one of your most valuable assets: your accounts receivables.

What's frustrating to many professionals is the number of people who share stories about the demise of their business by saying "if I only knew about alternative financing when I had my business I may have still been in business today."

The beginning of early alternative financing forms, such as factoring, dates all the way back 4000 years to the time of Hammurabi and the Mesopotamians. Yet it seems today about as many people are familiar with factoring as are familiar with Hammurabi and the Mesopotamians.

So here's the deal:

Some businesses find themselves needing capital to grow and manage their business. At times, these businesses are unlikely to obtain a traditional bank loan because of unacceptable debt to income ratios or low personal or business credit scores!

Many businesses, no matter how well they are run, cannot qualify for traditional bank loans due to personal credit issues, too few years in business and / or limited cash reserves.

When a capital need strikes, they face few smart alternatives to the bank, and then the owners must turn to family money, personal loans, or even cash advance firms that may charge astronomical rates.

Enter the "Factor". By outsourcing accounts receivables to a reputable company, one can have cash in hand, usually within 24 hours, for a nominal fee (1... 5%). These are the added benefits:
- The focus is on the business and not on collections.
- With cash in hand the owner can now negotiate better terms with suppliers.
- The business can now invest in equipment, hire new employees, start a marketing campaign and more.
So before the pain reaches the point that one decides to go to some of the last resort "boot strapping" measures, or before one’s business is perilously close to failure, seek the help of a cash flow expert to look for alternative and prudent ways to sustain and grow your business.

The solutions are out there. You don't have to be Mesopotamian to know that.

Alex Cherlin is a Cash Flow Expert with Compound Profit of Virginia

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Compound Profit's purchase order factoring recently helped a small, minority-owned construction company win a major contract with the City of Omaha.  Dennis O’Connell, Regional Director for Nebraska and Iowa, says “Our financing solution allowed the construction company to show the City that they had the funds to meet their supplier obligations along with payroll requirements”. 

The contractor chose Compound Profit because of the hands-on relationship and trust we were able to build along with our local presence.  Additionally, our understanding of the construction trade and the requirements for getting funding, our ability to work closely with bonding companies and to be very competitive from a pricing perspective allowed us to create a winning team.

Factoring is the purchase of some or all of the valid Accounts Receivables for goods and services that have been completed in business to business, or business to government transactions, at a discount. In many ways, factoring (also known as Accounts Receivable Funding) is similar to improving your working capital cash-flow by offering your customers a cash discount for paying their invoices more quickly.

So why would anyone want to using factoring? Because it will allow you to grow your business and allow you to accept contracts that you normally couldn't fund because you don't have the cash reserves to make payroll or purchase the needed equipment or supplies.

As shown in the above example, using factoring we helped a small business in Omaha win a major contract and fulfill their dream to grow and prosper.

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