Alternative Ways to Finance Your Company
By Russell Wardle,
President of Corporate Capital Source,
Sandy, UT, U.S.A.
Collateral is require by most banks, investors or loan institutions
in order to do asset-based lending. Risk is also involved in asset-based
loans. It is difficult to do asset-based loans for business that
have specialized equipment. Tangible equipment or things are not
the only assets available to be offered as collateral.
Assets are not just tangible things or equipment. Assets also include
accounts receivable. There is a way of leveraging those accounts
receivable as well as vehicles or other tangible things. It involves
selling the accounts receivable to a factor. Since it is the sale
of an asset, it can be considered a debt-free line of credit that
automatically grows as your company grows.
Accounts receivable can be considered net-30 day interest free loans
owed to you for products and/or services you have provided to a
customer. The net-30 days invoices can be sold for a discount to
a third party. The process is similar to a merchant selling credit
card invoices to a credit card company. The credit card company
pays the face amount of the invoice minus a percentage of discount.
In essence, the merchant is selling the invoices at a discount.
Factoring is also selling invoices at a discount. However, instead
of paying the whole amount minus the discount, a factor pays a percentage
of the invoice in one installment. Once the invoice has been paid
in full, the factor pays the reserve amount minus a discount. Thus,
instead of receiving one installment, the business receives two
installments. The reserve is considered collateral until the client
has paid the invoice. Several invoices with reserve amounts provide
security to the factor.
If a merchant is set up to receive credit cards for products or
services, the validity of the credit card is based on the user's
credit rather than the credit of the merchant. Likewise, a factor
looks closely at the clients of a business wanting to factor invoices
rather than the business benefiting from invoices factored. Ultimately,
the factor will receive money from the clients of that business.
Another difference between accepting credit cards and factoring
is that factoring is only for business to business or business to
government invoices. Factors generally don't factor invoices involving
business to consumer. A business invoicing government entities is
considered pre-qualified because the government is considered a
good credit risk.
It is imperative that a company have cash flow in order to operate
more efficiently. In order to do so, the company must have immediate
cash available. That is the main purpose for factoring invoices.
The line grows automatically as the business grows. It is particularly
beneficial to growing companies. When a company expands by filling
more and larger invoices, there is no need to apply for additional
funding. The funds increase automatically as the company grows.
If invoice factoring is not an option, and the business is unable
to qualify for conventional funds, it is possible to obtain money
for a company's future credit cards sales in exchange for money
up front. In this scenario, a percentage of future credit card sales
is automatically deducted to pay back the money. This is flexible
because the amount being paid back takes into consideration a variable
amount from week to week. More money will be paid when sales are
up and less when sales are down. The flexibility makes it easier
to work with the variability of sales.
It is very common for businesses to have uncollected accounts if
the company has been in business for any length of time. It is common
for companies to sell consumer debt to companies who specialize
in that type of collection. A company usually only gets pennies
on the dollar to sell that type of debt but the amount adds up when
selling thousands, tens of thousands even millions of dollars worth
of bad debt.
Companies knowing state laws concerning the statue of limitations
and other laws concerning collection are able to collect on some
of the accounts. Some people simply can't pay the debt when due
but are able to pay once they get out of a financial crisis. That
is why collection companies are willing to buy bad debt.
Alternative financing should always be considered time-sensitive
and transitional. Ultimately, a company's goal should be to position
in order to finance with less expensive conventional funding. The
reason for obtaining alternative financing in the first place is
to take advantage of the time value of money. Money badly needed
today is worth more than more money tomorrow. Alternative financing
is more expensive but in consideration of its time value, it is
worth paying more to have immediate cash available.
Russell Wardle is president of Corporate Capital
Source. His company provides commercial financing, factoring and equipment
leasing. Contact him at 801.676.0579. Also visit at: http://corporatecapitalsource.com
Published - November 2010