Every business needs to have a positive cash flow to meet payroll and pay its bills. A problem can arise for young businesses still trying to develop a financial reputation and those that have had financial challenges that have negatively affected its creditworthiness. In both cases, obtaining a business line of credit or loan from a commercial bank to have cash on hand to pay things can be difficult to get. One way a business that is credit-challenged can maintain a good cash flow is by using factoring agents or companies. If you are a fledgling business that is currently having trouble obtaining a commercial loan or line of credit, here is how factoring works to help you maintain a positive cash flow.
The process begins with the invoices you have that are still outstanding. A factoring company will give you a certain amount of money based on the total amount of money you expect to receive once your customer pays the invoice in full. A factoring company will charge a percentage of the total money "factored" (this is the amount the company has lent to you while they wait for the customer to pay the invoice). Usually, the more money you have factored, the lower the percentage charged.
A factoring company will keep a certain amount of money in a reserve account. The reserve account is used to financially protect the factoring company in case one or more of your customers fails to pay their invoice. The money is used by the factoring company to help it cover any financial losses.
Many factoring companies also have a fee structure for the various services that you will have to pay in addition to the percentage the factoring company takes and the money that goes into the reserve account. The fees typically cover costs such as invoicing you for their services and setting up the factoring account.
The factoring company will do a risk assessment on your customers to determine their credit-worthiness to determine the likelihood they will pay the invoice on time and in full. Only the customers whose invoices you will be using will be given a risk assessment. You should expect that you will have customers who will not meet the credit standards of a factoring company. In this case, the factoring company will decline to factor invoices sent to these customers, or they will charge a higher factoring fee to cover any potential losses.
Once the customers and invoices are approved, the factoring company will send you a percentage of the amount in the invoice – minus the fees, reserve funds, and other charges. You can use this money to maintain a positive cash flow to pay bills, suppliers, and employees.
For commercial banking, click this link http://www.crossplainsbank.com or do an online search.