Every small business owner dreams of a large corporate contract or high net worth customer - one that pays in timely manner and helps your business grow. However, most large companies operate on a longer net term payment schedule than your small business - sometimes as long as 90 days! In the short-term, you need to make payroll to pay the employees who are fulfilling the large order for your very important client. A vicious circle, but one that can be easily solved with invoice factoring.
After all, there are only so many bills the business can pay on credit and you need cash on hand for payroll. Here's a simple explanation of how factoring works:
1. Your business sells (a portion of) your accounts receivable invoices to a third party. 2. The third party -- the factor -- buys the invoice at a discount in exchange for immediate cash paid to your business. 3. The factor then collects the full amount of the invoice when it is paid.
It's that easy. The best part is that invoice factoring has has no impact on the credit of your business, the business remains debt-free and has no obligation to collect on the original invoice, should it not be paid to it's new owner - the factor. If the debt should go to collections - the risk and cost of collecting is owned solely by the new owner - the factor.
Invoice factoring is a common business practice and falls within General Accepted Accounting Principles (GAAP), so its perfectly legal. Factors assume the risk of the debt collection, and the return is the total amount of the debt though they may have only paid a portion of it to your business. Risk yields return - a typical business model - both parties receive a return and assume a degree of risk.
Here's an example of how factoring can help you make payroll - or even pay out holiday bonuses - in the same fiscal year - making it easy for you to close the books for year end! There are $50K worth of outstanding invoices as of December 1, your fiscal year ends December 31 and you have $25K cash on hand. Standard payroll during the month of December is $25K and you would like to pay employees a holiday bonus for the big job they just finished - but you have no cash leftover for bonuses or other emergencies. You sell the accounts receivable to a factor for $45K which gives you plenty of cash to pay bonuses, keeping your employees happy and working hard for your business. And you have cash on hand for an emergency and are now able to close the books officially for year end. What a relief! Invoice factoring can really save your small business.
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Kristin Gabriel works with The Interface Financial Group, North America's largest alternative funding source for small business. The company provides short-term financial resources including construction factoring and serves clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in factoring, accounting, financing, law, marketing and banking. http://www.ifgnetwork.com
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