In the United States, factoring is often viewed as a “last resort” option. In this article, I argue that factoring accounts should be the first option for business growth.
Two important points of turning points in the life cycle of companies
Turning Point: A New Business. If companies are less than three years old, access to capital is limited. Sources of debt are looking for historical income data that shows the ability to service debts. The new business does not have such a story. This makes debt risk very high and significantly limits the amount of available debt sources.
As far as share capital financing is concerned, US direct investment almost always comes along with a pie. The younger, the less proven the company, the higher the percentage of capital to be sold. The entrepreneur must decide what part of his business (and, therefore, control) he wants to give up.
Factoring of invoices, on the other hand, is asset-backing. This is literally a financial instrument for sale. This tool is a business asset called an invoice. When you sell an asset, you do not take the money. That’s why you have no debt. The bill is simply sold at a discount from the nominal value. This discount is usually from 2% to 3% of the income, which is filed by bill. In other words, if you sell $ 1,000,000 in bills, the value of money is between 2% and 3%. If you sell bills in the amount of $ 10,000,000, the cost of money remains at 2% to 3%.
If an entrepreneur first opted to factorize invoicing, he / she could bring the company to a stable point. This will greatly facilitate access to bank financing. And this will provide more opportunities for negotiating the issue of equity financing.
The turning point: rapid growth. When a mature company reaches a point of rapid growth, its costs can outstrip profits. This is due to the fact that money transfers from customers for a product and / or service come later than payroll and suppliers. This is the time when financial statements of a company may reflect negative numbers.
The sources of debt are extremely reluctant to borrow money when the business shows red ink. The risk is considered too high.
Sources of equity finance see the company in strong stress. You acknowledge that the owner may be willing to give up additional capital to obtain the necessary funds.
None of these situations are beneficial to the business owner. Factoring accounts facilitated access to capital.
There are three main criteria for calculating factorization.
The company must have a product and / or service that can be delivered and for which an account can be created. (Companies have no claims to income and therefore nothing can be taken into account.)
The product and / or service of the company must be sold to another entity or body.
A company that sells goods and / or services must have a decent commercial loan. That is, you a) must have a history of timely payment of bills and b) can not be in default and / or on the verge of bankruptcy.
resume
The factoring calculation helps to avoid the negative impact of debt and equity finance for both young and fast-growing companies. It provides an immediate solution to the temporary problem and, if correctly used, can quickly bring the business owner access to debt or equity financing on their own terms.
This is a much more convenient place.
Mr. Kocharuk – vice president of sales at the 1 st FMB Bankrupp – is a factoring and trading company with headquarters in Los Angeles, CA. PMF provides Global Factoring and Trade Finance services.
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