In today's times of tightened credit, small businesses are not only looking to financial institutions, but also to their suppliers, as sources of funds. Recently a Small Business Association (SBA) Office of Advocacy study documents trade credit as almost as pervasive as bank credit in both incidence and volume. The study looks at how small businesses' use bank credit or loans, versus trade credit, also known as supplier credit.
Invoice factoring allows a company to provide credit to its customers while at the same time obtaining cash for business operations and growth.
This research compares firms that use credit - leveraged - with anyone who does not use credit - unleveraged and which kind of credit leveraged firms use. For example they could use bank credit, which includes loans or lines of credit, or trade credit from suppliers, or both. According to the research bank and trade credit are often used simultaneously by smaller businesses. Trade credit is used by three-fifths of the small firms that use credit.
Our economic times are challenging, and as policymakers continue to focus on how to get banks to increase lending to small businesses, it may very well be in everyone's best interest if they also addressed the equally important trade credit channel of funding.
While the study provides a better understanding of the credit used by small business, alternative forms of financing such as invoice factoring allow a business to provide credit to its customers while at the same time obtaining cash for important business operations and growth.
During normal operations of businesses every day, companies of all sizes extend credit to one another in the form of accounts receivables. For instance, a business might submit an invoice with the terms of trade being "2/10 net 30" meaning that a two percent discount would be given for payments made within 10 days or the full amount is due in 30 days. Trade credit is an instrumental business financing tool.
Invoice factoring benefits businesses that do not get paid for 30 to 60 or 90 days by advancing up to 90 percent against invoices. Bank loans involve two parties, while invoice factoring involves three parties, and while banks base their decisions on a company's credit worthiness, factoring is based on the value of the company's receivables. Invoice factoring is not a loan - it is the purchase of financial assets.
Some of the more popular types of factoring solutions include export factoring, providing factoring services for companies who export from the United States and Canada; P.O. funding to finance purchase orders when a company receives a purchase order and needs to purchase supplies before they can begin to complete an order; and inventory financing, a solution promoting a company's growth by funding them when they must expand and purchase inventory.
Invoice factoring has been around for thousands of years. It starts with due diligence that typically takes one to two business days, and after this has been completed the client is at liberty to offer invoices to a factoring company for purchase.
What's more, most factors do not expect to buy 100 percent of a company's receivables, and there are no minimum or maximum sales volume requirements. Upon receipt of invoices, the factoring company checks the credit of the debtor named on the invoice and makes sure that the sale represented has been satisfactorily completed. Once this is done the debtor is advised of the purchase by the factor, at which time the client receives their money.
Most factor's professional rates are competitive because each client's circumstances vary, which may have an impact on the fees charged. This allows choices of invoices to be factored, enabling customers to retain most of their money, while spending the minimum in fees.
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