How To Increase Your
Business Credit Lines By Factoring Receivables.
8-06-2005
Businesses have access to
five types of Business credit. The first one is the most obvious, and
that is your bank credit line backed by business or personal assets and
personal guarantees. The second is non-asset based like credit cards
used by many small businesses and start-ups. The third is trade credit,
like vendor-supplied, unsecured lines of credit for purchases of their
product. The fourth is equipment leasing and the fifth is tapping into
your customers’ credit strength. The last one is the most important one
that many business owners do not know exist.
The third, trade credit will only apply to businesses that purchase raw
goods or inventory for resale. It is much easier to grow your vendor
credit lines than asking a bank to extend credit. Most businesses purchase 80% of their goods from a few
vendors. Is your business able to take advantage of 2% net 10 day terms? Most businesses are not taking advantage of early pay discounts due to money being tied up in receivables.
Why is it important to manage your business credit with vendors? Your
business credit can save you money or cost you money. Presenting your
business in the best light can directly increase your bottom line. Your
company may look financially unstable or unhealthy when you continually pay past
your credit terms and this can cost you money!
It is standard in most industries to offer 2% net 10. Some industries
offer more but will not print it on their invoices. You may want to call
and ask the comptroller and see if they will offer a 4% net 10. Call
competitive vendors and see what their terms are to make sure you are
getting a good offer for paying within net 10 days. We have seen as much
as 10% for net 10 day terms. But be careful. If not, you might just be
giving away a price reduction you might have been able to negotiate
anyway.
By factoring receivables, you will be able to take advantage of early
payment discounts from all your vendors that offer these terms. In order
to increase your credit lines with your vendors, you need to be in very
good credit standing before you ask. Businesses that take advantage of
these terms every month are far more noticeable by the credit
department.
Vendor credit lines can grow faster than a bank credit line if you play
your cards right. In addition, vendors rate customers by volume and
ability to pay. Some business owners have a better edge when it is time
to negotiate better prices by having a history of paying their bills on
time.
The fourth credit line is off-balance sheet equipment leasing. When you
can provide bank statements with good cash flow and establish four trade
references you can brag about. You should be able to buy equipment at
very low rates. Equipment leasing offers advantages over a bank loan
because it
shows up on your balance sheet as rental equipment and not a liability
like a bank loan. The key is to reflect as little liability as
legitimately possible on your balance sheet.
So how do you tap into your customer’s credit strength?
The fifth credit line is one that many businesses do not know about. By
factoring your accounts receivable, you will be able to tap into your
customers’ credit strength by obtaining advances against funds your
customers owe you. A factoring company establishes accounts receivable
credit lines based on your customer’s credit or ability to pay, not
yours. Factoring is not a loan, and the funding of invoices is viewed as
a purchase of a company's invoices.
For example, let’s say you have 10 large customers with good credit
ratings, and each is assigned a credit facility of $250,000 based on
their ability to pay. Factoring your accounts receivable enables your
business to sell on net 30 day terms for up 2.5 million dollars. At your
option, you can ask the factoring company to fund your invoices daily or
what ever meets your needs.
With the increased of cash flow, you can take advantage of early
payments to vendors with 2% net 10 terms and offset some of the cost of
factoring. It is that simple. This is far more leverage than a bank will
ever assign.
In summary, By increasing cash flow through factoring, you might be able
to negotiate better terms from suppliers and vendors, qualify for
preferential pricing, and keep your balance sheet debt free.
Other Services:
Purchase Order Finance
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This Document has been
digitally date stamped and is monitored. Please do not copy without permission.
1st Commercial
Credit, a
nationwide
factoring company headquartered in El Paso, Texas. Provides accounts
receivable financing in the US, Canada, and the UK; offers
export trade finance to clients in every major world
market and can convert receivable finance transactions in 17
currencies.
Other related pages by industry:
Factoring Temporary Staffing Companies
Factoring Medical Providers
Factoring Medical Staffing Agencies
Factoring IT Staffing Firms
Asset Based Lending
1st Commercial Credit (SM) is a trademark of 1st Commercial Credit, LLC.
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