|Using A Factoring Company- A Chat With A Businessmen
Read this post to understand How Does Trucking Factoring Work.
I’ve owned 11 businesses and still own four of them and in the event that you ‘d like to learn one of them has an Letter Of Intent to Buy in hand and reached profitability using INVOICE DISCOUNTING ONLY and is totally – as in completely – debt free. The reason? They never had to borrow.
Regarding having used or not used factoring: With three of them and soon to be a fourth I have utilized invoice discounting. Why? You can capitalize the business without borrowing because receivables factoring is not borrowing. FYI: One of those businesses fulfilled orders it could only have hoped for carrying out had it not used invoice discounting. It’s the one with the LOI in hand in fact.
Invoice discounting, like it or not, is really a front end transaction that capitalizes a company without their having to borrow. It’s not complicated and only dates back to the Eqyptians … and still gets the job done. About it not opening the flood gates? If you have a million dollars in invoices and can not borrow against them nor convert them to cash your business (my businesses were any way until I factored) are dead in the water until you get in some cash. If you have some alternative to that then God Bless you . An invoice is a non-performing asset until you can turn it into cash but I am sure that I’ll stand corrected.
QUESTION: If you as a business owner could hire a sales person and they would help you access sales you otherwise could not BUT you had to pay them a 2 % – 3 % – 5 % commission BUT they would boost your business 10 or 20 or 30 % would you employ that person? If you agree this then you are endorsing receivable factoring. It’s not different than a credit card transaction. The business owner is selling off the transaction to a third party to get the payment so how is invoice factoring different from cc transactions?
As to the cost of invoice factoring? It appears that surrendering 2 % on the front end of a credit card transaction is okay (on a daily basis and using your formula in your reply incidentally that calculates annually to 760 % incidentally but we both understand that this isn’t true now don’t we?). Why should a retailer accept cc processing? More business perhaps? More substantial sales? And what are doing? They are selling the transaction to the credit card company. Yes? No? FYI: I offer that service too … not brain surgery.
Invoice discounting can be be utilized by a company that is turning away sales and can not grow otherwise and note: The only time that they use receivable factoring is when they need working capital to complete an order that they would normally lose. It’s like the sales commission: The only time you pay the salesman is when he sells i.e. it’s a sale you either didn’t have with the salesman or it’s a sale you can’t fulfill because your money if tied up in your invoices and you can’t get it out.
That said it’s pretty simple equation when you can not access liquidity:.
1.) Use a factoring company and surrender 3 % of the sale OR kiss off the sale and fail the customer and lose my profit margin … 10 %? 20 %? 30 %?
2.) Use factoring and surrender 3 % of the sale OR kiss off the sale and disappoint the customer and lose my profit margin … 10 %? 20 %? 30 %?
3.) Use a factoring company and give up 3 % OR kiss off the sale and disappoint the customer and lose my profit margin … 10 %? 20 %? 30 %?
What component of being in business to maximize a profit am I skipping?
Regarding the 24 % annually(or as above it would be 36 %) let’s bear in mind that the owner of the business above got to complete transactions that he or she otherwise wouldn’t have had the ability to. Not a lot different than the retailer that get’s to close a sale with a customer comes in with their cc is it?
Also please explain this: A bank loans someone money ($100,000) at 9 % annually. A receivable factoring company delivers $100,000 a month at a 2 % discount and carries this out 12 times throughout a year. Hmmmmnnn … the bank gave $100K for 9 % BUT the invoice factoring company in fact delivered $1,200,000 for 24 % so which is the more desirable offer? The bank? It owns you: Invoices, inventory, equipment, your house and your signature … the factor has a right to your invoices: End. Which is more desirable?
Additionally: Exactly what happens with the bank when you need $200,000 and you are only approved for $100K? If you have invoices the factoring firm funds you and you make the sales and gain the profit … the bank says to you, “Let’s see how you do over the upcoming year and revisit” or the infamous reply, “We don’t like your collateral and your credit is weak” and the bottom line is that they don’t have ability to take the risk or perform the work that a factor does.
ALWAYS REMEMBER: MONEY IS NOT LOANED IN A FACTORING TRANSACTION. If you can not accept or comprehend that then there is no sense in chatting more on this …
In closing: To correlate to the last statement that invoice factoring at 2 % monthly in discounted interest costs 24 % in interest margins annually then I’ll accept that but only if it can be acknowledged that a company that sells product with a 30 % monthly margin herewith generates a 360 % annual profit to which you will shout back “They’re not the same” and to that you ‘d be right: Invoice Factoring and borrowing money from a bank … Are certainly not the same.
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