getting your business funded
TRANSCRIPT
1Getting Your Business Funded
www.overnitecapital.com
A Publication of
Getting Your Business Funded
2Getting Your Business Funded
www.overnitecapital.com
TABLE OF CONTENTS
A bank isn’t always available................................................................................11
Help with burdensome business functions............................................................8
Immediate cash..................................................................................................... 8
A step by step example..........................................................................................5
Who uses factoring?...............................................................................................6
Nothing to repay.................................................................................................. 11
Introduction............................................................................................................................3
Chapter 2 - Advantages of Factoring?...................................................................................7
Chapter 1 - What Is Factoring?............................................................................................. 4
Chapter 3 - Differences Between Factoring and Traditional Finacing Methods..................10
Conclusion............................................................................................................................12About Overnite Capital.........................................................................................................13Contact Us...........................................................................................................................14
Getting Your Business Funded
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INTRODUCTION
Every business must contend with the problem of generating enough capital to maintain proper company operations and finance opportunities for expansion. When cash isn’t readily available, many organizations have recourse to a number of financing options that can provide them with the funds they need—but these options tend to have their drawbacks. Some financing methods, such as bank loans, may be unobtainable for struggling companies, while other options, such as equity-based financing, tend to come with unattractive conditions. However, there is an often-overlooked financing method that has spiked in popularity over the past few years, particularly in the small business community. This is factoring.
Factoring is a financing method that has allowed numerous businesses, large and small, to secure needed funds in a timely manner. The process is simple: The business simply sells its accounts receivables to a third-party, called a factor, at a discounted rate. In general, factors are independent firms, although a minority of them are owned by banks.
Though little-known to the general public, factoring is not a recent innovation; in fact, it is one of the oldest types of financing available to businesses. Factors manage billions of dollars in accounts receivables every year. Below we’ll take a closer look at factoring in greater depth, exploring its benefits and its advantages over traditional financing methods.
Getting Your Business Funded
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CHAPTER 1
Factoring is an arrangement made between two entities: the client that will be receiving funds, and the financial intermediary—the “factor”—that supplies the funds. The factoring process works as follows: The client initiates the process by offering to sell its outstanding invoices or accounts receivable to the factor. If the factor accepts the deal (we’ll explore the approval process later), it then advances the client the majority of the invoices’ value. The specific percentage varies, but the client can expect to receive at this point somewhere in the neighborhood of 70 to 90 percent of the worth of the accounts receivable. The client is now able to spend the cash on business expenses or virtually anything else.
After this, the factor goes about collecting the unpaid invoices. Once these outstanding debts have been collected, the factor then sends the client the remainder of the owed sum. Keep in mind that the factor does subtract a transaction fee from the sum—this is how it makes money from the deal—but the remainder of the collected revenue is sent to the client.
At this point, the transaction has concluded. If all goes well, the client has eliminated its outstanding invoices and received a substantial amount of money much sooner than otherwise would have been possible. Meanwhile, the factor has made a profit due to its transaction fee. Everyone benefits.
WHAT IS FACTORING?
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Let’s say Company X has suddenly incurred some unforeseen expenses—a huge property tax bill, for example. Company X does brisk business and can reasonably expect to collect a significant amount of revenue in the months to come. In the next quarter, the company will have more than enough cash to handle the tax bill. Unfortunately, that tax bill can’t wait until the next quarter; it’s due much sooner. Company X contacts a factoring company that may be able to provide funding. To kick off the process, Company X sends the factor all relevant information—this may include a list of customers, the company’s gross sales in the previous year, the total amount of its outstanding invoices, and any financing methods already utilized by the company. After analyzing all important elements, the factor determines that there is an acceptable level of risk involved in signing a transaction agreement with Company X.
The factor then purchases $500,000 worth of outstanding invoices from its new client—but at this stage, Company X does not receive that entire amount. In this particular case, the factor has agreed to fund 80% of the invoices’ value at the outset. This means that Company X gets $400,000, which it promptly uses to resolve its tax debt. Incidentally, this whole process has taken place over a very brief timespan. After verifying the invoices, the factor sent this amount to Company X only 48 hours later.
At this point, the factor assumes the responsibility of collecting the accounts receivables that it purchased from Company X. Once this has been accomplished, the factor sends the remaining $100,000 to Company X—minus the factor’s transaction fee.
A Step-by-Step Example
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As a financing option, factoring isn’t widely known to the general public. Those who have heard about factoring tend to associate its use with large corporations attempting to optimize their cash flow and/or with struggling businesses in desperate need of money just to stay afloat. This view is, however, a highly inaccurate one. Factoring is used by a wide range of businesses—and its popularity is steadily rising. Businesses that utilize factoring include, but are not limited to, the following types:
Who uses Factoring?
Fast-rising young entrepreneurs that require immediate cash to finance quickly expanding operations.
Businesses where Days Sales Outstanding (DSO) and open terms of sales are net 30, net 45 or net 60.
Companies with fast growth cycles.