What is Invoice Discounting and Factoring?

Invoice discounting is a form of invoice financing in which a lender provides cash based on your business’s accounts receivable ledger. These are typically short term loans that will pay a percentage of your accounts receivable in cash while you wait for your outstanding invoices to be paid by your customers. Factoring companies specialize in providing fast financing for businesses that need it, based on their accounts receivables.

Read more about factoring companies at Factoring Journal

One of the hardest things for small businesses and start-ups to overcome is the issue of cash flow. Even if you’re turning a profit, you’re cash flow situation could be entirely different. While you have to wait for your customers to pay their invoices, your overhead and operating expenses still have to be paid. Invoice discounting is one option to get the cash from your receivables almost immediately.invoice-discounting-man-thinking

There are several different types of invoice financing, including invoice factoring. In all of these invoice financing situations, the business uses unpaid accounts receivable as collateral to raise cash quickly. This accelerates the cash flow from customers so that companies can continue to operate or grow.

How Does Invoice Discounting Work?

First, you work with a lender who will analyze your accounts receivable ledger to determine the percentage of cash the lender will make available to you. The lender will charge interest on the loan as well as fees for the transactions. Lenders typically make cash available within 48 hours after an invoice is issued.

With invoice discounting, you maintain control of your accounts receivable. You are still responsible for invoicing the customer and chasing down payment, if necessary. This is different from “invoice factoring” in which businesses essentially sell their accounts receivable to a 3rd party who is then responsible for collection.

With invoice discounting, when the customer pays the invoice, it will be paid into an account that’s controlled by the lender. The lender receives the full payment and pays you difference from the loan, minus interest and fees. This transaction is confidential. Your customers see a seamless payment process and are not aware of the financing.

Example of Invoice Factoring

Your business, John’s Lawn Care, contracts with XYZ Lending for factoring his receivables. Assume that you have a $100,000 invoice due.

XYZ Lending determines that they will provide 75% of the invoice amount. XYZ Lending provides you with $75,000 after you issue the $100,000 invoice.

Your customer receives the invoice and pays $100,000 to John’s Lawn Care. To the customer, it appears that they have paid the bill directly to your business.

When the invoice is paid in full, XYZ Lending will pay you the remaining $25,000, less interest and fees. The interest rate charged is typically above prime interest rate and monthly fees typically apply.

At the end of the transaction, John’s Lawn Care received payment on the invoice almost as soon as the invoice was generated. The company will pay in the form of interest and fees for the ability to access the funds immediately.

How Does It Help Your Business?

Cash flow is difficult to manage when you are waiting for accounts receivable. This is especially true for small businesses and start-ups. Many start-ups fail during the first year due to negative cash flow.
Invoice discounting will help you to manage your cash flow and provide a constant, consistent stream of cash for your business. The cash can be used to fund operations in the short term or as an investment in continued growth of the company.

What Types of Businesses Should Consider Invoice Discounting?

Although invoice discounting is a viable financing tool, it’s not right for every business. In fact, the cost of invoice discounting should be seriously considered when looking at financing options.
Typically, this type of financing is used by small to medium sized businesses in an effort to stabilize operations, especially during the early stages of the company’s existence until cash reserves can be built. This is also an option for companies that are growing quickly and need the cash to capitalize on that growth.

Invoice discounting is a good option for companies with high profit margins. Those profit margins can cover the cost of the interest and fees associated with this type of financing. If the profit margin is too low, the cost of invoice discounting could severely impact profitability.

Read more about businesses with high profit margins at Entrepreneur.com

The Bottom Line

If your business is in need of cash to cover expenses or capitalize on growth opportunities, invoice discounting may be one financing option. Using your accounts payable ledger as a form of collateral, you can gain access to cash almost immediately upon issuing an invoice. Check with lenders on the interest rates and associated fees to determine if invoice discounting makes sense for your business.

Your Cash Flow Problems Solved – For Good

Cash flow is one of the most critical components of small to mid-sized businesses. In general, cash flow refers to the money coming into and going out of a business.

Research suggests that problems with cash flow are one of the main reasons for business failure. Trying to manage a business without a handle on the cash flow is nearly impossible, especially for start-ups and small businesses.

There are essentially two forms of cash flow – positive and negative

Positive cash flow results when there’s more money coming into the business through sales and accounts receivable than funneling out of the business through accounts payable and expenses.

Negative cash flow is the exact opposite and a problem for most businesses that do not focus on cash flow. The result is more cash going out of the business than coming in at any given point.

Profit vs. Cash Flow

Profits and cash flow are not one in the same. Selling products or services to your customers create profit on a P&L statement. But actually collecting on the outstanding invoice is what creates the cash.

Your business needs cash to operate, pay the bills, and pay employees. Keeping up with those payments allows your business to make the goods and provide the service, which creates the profits. Not having enough cash available will limit your ability to grow the business and increase profits.

Tips to Manage Your Cash Flow

Focusing on cash flow management will not only help to stabilize your business but will also allow you to invest in growth. There are a few ways to keep your focus and manage your cash flow.

Maintain Some Cash Reserves

There will be shortfalls in your cash situation, that’s inevitable. Be prepared for those shortfalls with enough cash reserves to cover a few months of expenses, payroll, etc. This is not an easy task, especially when you are trying to increase profits immediately, but it is necessary to ensure that your company remains financially stable during those times when shortfalls occur.

Get Your Customers to Pay You

This seems pretty obvious, but the sooner you invoice your customers and receive payment, the better off your cash flow situation will be. Make sure to send an invoice as soon as the goods are delivered or services are rendered. Assign someone the task of keeping up with customer invoices and sending past due notices.
Another option is to offer your customers a discount for paying before due date. A 2% discount may eat into your profits, but it might be enough to encourage your customers to pay early and help with your cash flow.

Get the Best Payables Deal

The opposite of the previous tip, by getting your creditors to extend longer terms on your payables you can delay payment while waiting for your customers to pay. That’s not the same as paying your bills late and incurring late fees. With a little bit of negotiating, some companies will extend payables to net-60 or net-90.

Scrutinize the Credit

Not all of your customers will be a good credit risk for your business, so make sure you do your doing your homework and checking their credit. Establish written credit policies and stick to them. Assign someone the task of checking the credit for each of your potential customers.

Delegate the Duty

Running your own small to mid-sized business is more than a full time job and you can’t do everything yourself. If you have staff, this may be one of the tasks you consider delegating to a trustworthy, detail-oriented employee. This person can monitor the cash flow, do the credit checks and keep up with accounts receivable and invoicing.

Secure a Loan

This may be the last option to pursue, but there may be a time when you need a little bit of help to get your cash flow to a manageable level. A short-term, low interest loan may help you to get back to a positive cash flow and be able pay off the debt quickly. This is a last resort, since this option will cost you money and eat into your profits in the long run.

What’s Next?

The only step toward better management of your cash flow is to get a handle on what your situation is right now. What are your cash balances? What will your cash situation be in 3 months or 6 months or a year? If you can’t answer those questions, you already know you have a problem.

Conclusion

Continual monitoring of your cash flow is a critical step in the management of your business. Don’t confuse cash flow with profits. Understand your cash situation, what’s coming in and what’s going out. Take steps to make sure there’s more coming in than going out. And don’t lose focus on the cash flow equation to keep your business running for a long time to come.

Top 10 Home Based Businesses to Start

Start a home based business and this could be your workplace.Most of us dream of waking up in the morning and heading to work right across the hall in our home office. Or dream of working at our own pace, setting our own schedule, and being our own boss.
While not everyone will achieve that dream, it has become easier than ever to start and run a business from the comfort of your own home. With technology, the internet and a little bit of expertise, almost anyone can start their own business, work from home, and be their own boss.
Over half of all businesses in the United States are home-based business. In fact, some of the largest American corporations began as a dream out someone’s garage or basement (ever heard of Apple, Inc.?). Although there are certainly challenges to owning and running a home-based business, there are also plenty of rewards.

Is A Home-Based Business Right for You?

While we may all dream of working at home, not everyone is cut out for this type of business venture. Successful home business owners are the ones that are willing to take a risk and work hard. And there are plenty of things to consider when deciding to start your own business at home.
Deciding on what product or service to offer is one of the first steps. What are you good at? What are you an expert in? Think about your background and about what unique talents you have to offer customers and clients. Think about what you love to do and turn it into a money making opportunity.

Top Home-Based Businesses

The possibilities for home-based work are endless. Below are a few suggestions of some of the top home-based businesses. Use this list as a guide and apply your skills to find the perfect business for you.

Accounting/Bookkeeping

Do you have any accounting education or experience? Do you have experience as a bookkeeper? Many small organizations have a need to for some bookkeeping help, but not enough to hire someone full time. This is a perfect opportunity for someone with accounting experience to take on some freelance work remotely.

Consultant

For every industry and every type of business, there are consultants. Consulting is a great home-based business for anyone with extensive experience and a high level of expertise in a given field. Some examples of fields where consultants are used regularly include human resources, management, information technology, risk and safely, and hundreds of others.

Editorial and Writing Services

Freelance copywriting, editing and proofreading opportunities are available for anyone with a background in professional writing and editing. There is plenty of work out there for freelance editorial and writing services and plenty of opportunity to make a living in the field.

Virtual Assistant

Busy companies and executives are increasingly hiring virtual assistants to keep up with email and social media posting. If you have a knack for staying organized and maintaining electronic communications, you could work from anywhere as a virtual assistant.

Event Planning

Are you the life of the party and do you love hosting events? Then maybe a home-based career in event planning is the right job for you. Working with clients to plan their weddings, parties, and events is a home-based job that also gets you out of the house and interacting with people. It’s the best of both worlds while still setting your own schedule and running the business from your home.

Interior Decorator

If you’ve had experience with interior design and decorating, this is a rapidly growing field for home-based businesses. Interior decorating is another business that will sometimes take you out of the house while managing your business from home.

Financial Planner

Similar to consulting, there is always a demand for financial and estate planning from experienced experts in the field. If you’ve had a career in financial planning and want to break away from the 9 to 5 grind, consider starting your own home-based financial planning business.

Computer Repair

With some information technology experience or education, you can start a business repairing computers and peripherals. Also consider repair of other electronic items beyond computers if you have the skills to expand to other opportunities.

Home Inspection

Partnering with real estate agents in your area will help to build a home inspection business. This home-based business does require experience and continued training in new home building products.

Graphic Design Services

Many companies use freelance graphic designers to create newsletters, advertisements, fliers, and a host of electronic media as well. Offering your clients graphic design services along with editorial and printing services will expand your reach and increase your opportunities.

The Bottom Line

You don’t have to be tied to your 9 to 5 job anymore. Using your knowledge and expertise to create your own home-based business will give you the freedom to be your own boss. Hard work and determination will make your home-based business a success.

Small Business Loans 101

Whether you’re starting a new business, running your small home based business or in the processing of growing an established one, you will likely be in need of cash at some point during the process. Although most people are familiar with personal loans and lending, many small business owners are new to the world of small business lending.
When it’s time to secure financing for your business, a bit of preparation could make the difference between approval and denial. Here’s a quick guide and some tips to getting a small business loan.

What Do the Banks Look For?

No two banks are the same and the specific criteria for any loan will differ from bank to bank. However, there are a few standard items that banks consistently look for when reviewing a small business loan application.

Nature of the business

The bank needs to have confidence in the viability of the business. The loan has to be used for legitimate business purposes. Obviously, if your company is involved in any questionable business (i.e. speculation, gambling, pyramid schemes), the bank will not consider your application simply on those grounds.

Your personal history

The bank will absolutely check you out and not just your credit history. They will look at your ability to run the business, your experience, your education. The bank will evaluate its own risk based on your personal credit.

Your investment.

The bank will be looking for collateral for the loan and also reviewing how much of your own money you have invested in the business. This proves to the bank that you have skin in the game and won’t be willing to just risk the bank’s money. This is also an indication of your ability to pay back the loan.

What Documents Will You Have to Provide?

There are a number of documents that you will have to provide when you apply for the loan. Different banks require different documentation, but you should expect to provide at least some if not all of the following:
• Personal and/or business credit history and reports
• Financial statements and forecasts for the business. You may also be asked to produce personal financial statements.
• Business plan
• Cash Flow Estimates
• Personal guarantees from all owners of the business, if applicable.

Providing this documentation in a timely and organized manner will be helpful. The bank’s decision won’t be based on the presentation of the documents, but you will gain some credibility with a polished, professional presentation.

How Do You Choose a Loan and a Lender?

Lending isn’t what it used to be. There is now a wide variety of loan products to choose from and just as many banks offering those products. Take your time to review your options when it comes to the institution and the product.

In general, it will be more difficult to secure a small business loan from a large banking institution. This is especially true for start-ups. With the right profile and credit history, you may be able to secure a loan from a big bank, but it won’t be easy.

Start your search with community banks or credit unions instead. It’s also helpful to start with a bank that you already have a relationship with, especially if it’s a good one.

Take the time to educate yourself about the loan options available before you even make contact with the bank. Understanding your options will help you to ask the right questions of the bank and make an educated decision.

How Do You Make the Pitch?

You’ve done all your homework and you’re ready to sit down with a loan officer. What are you going to say? You should be prepared to address a few basic questions before they are even asked.

Why do you need the money? Being able to articulate why you need the money and what the money will be used for is a critical step in this process. If you can’t pinpoint for the loan officer exactly what you need the money for, it will be difficult for him to have faith in your business plan.

How will you pay the money back? You will need to present a clear picture of your cash flow and your cash forecast for the bank. Having a plan to repay the debt before you even get approved will show the bank that you’re serious about repayment.

What if you can’t repay it? Similar to having a repayment plan, you should also have a backup plan. No one expects their business to fail and no one expects to fall on hard times, but it happens. Have a plan and be able to articulate it if asked.

Although you are trying to put your best foot forward to get the loan, you also need to be up front, honest and straight forward with the lender. A professional presentation and well-articulated answers to the questions will go a long way.

The Bottom Line

Small business loans aren’t easy to get, especially for start ups. But with some preparation, a clear business plan, and the ability to articulate the plan, a small business has a better chance of securing the financing it needs to continue to start or grow a business.