This post is brought to you by Andrew of CBAC LLC.
Any changes in the economy are likely to have far-reaching changes in society as a whole. Downturns or upturns in the economic activity of a nation or smaller community, changes in economic policy or new economic laws can affect the ways in which people live and conduct business.
But there is at least one form of financing that is likely remain largely unaffected by economic change of any sort—and that is invoice financing. That is the subject of this blog post.
What is invoice financing?
Before discussing exactly why such is the case, we must define what we mean by “invoice financing.” The terms accounts receivable financing and factoring can be used to mean the exact same thing. Whatever it is called, it can be defined as “selling invoices or receivables at a discount to a ‘factor’ for immediate cash.” Accounts receivable is the label used by bookkeepers for a general ledger account that contains the total amount of money that is owed to a company. It is typically the controlling account for a subsidiary ledger consisting of accounts for the individual debtors.
The invoices are sold at a discount, typically a tenth or a twentieth of their original value. By selling their receivables in this way, companies can provide themselves with extra capital in case they need it. One should not, however, confuse factoring with discounting. The latter process—which accountants in the United States refer to as receivables assignment — consists of taking out a loan using accounts receivable as collateral.
Incidentally, factoring may sound modern, but it is nothing new — the ancient Romans were among the first to practice some form of what we know as factoring.
Why will it remain untouched?
Now we must proceed to answer the question that naturally rises from the title of this post: What is it about invoice factoring that protects it against incursion by changes in the economy?
The most important reason is that it is an option for almost any business, old or new, large or small, sole proprietorship, partnership or corporation. All that is really required is that the clients be credit worthy. Another reason is that the results of the transaction take effect immediately, with no intermediate factors that could cause things to turn out differently than expected.
Factors that can have a negative effect
While economic downturn may not impact the invoice finance market in any negative way, there are at least five factors that can do so, each of which is relatively minor has a solution. Many customers misunderstand the prices of invoices, which they feel are too high and so refuse to buy them, or the range of products available; this problem can be fixed by making prices more transparent by analyzing costs vs. benefits, and by using government, marketing, banks and accountants to promote the facilities. Such promotion would also eliminate the pricing differential between invoice forms—the “credit control benefit” which is associated with factoring has led many customers to assume that discounting should be half as costly as factoring. Quotes can be used to satisfy the need for a way in which applications can be accepted without delay. Finally, the problem of the apprehension of “hidden costs” by customers could be solved by sellers charging an overall price and adopting a simpler approach to pricing.
Ways in which invoice financing benefits the individual business
The number one benefit of factoring – as an alternative source of working capital – has already been stated. There are many others in addition. Invoice financing can make a company’s marketing budget work much better and make it possible to purchase more supplies and equipment and pay the bills on time. And for the owner or owners of a medium-sized business, bank loans or credit may not provide the kind of working capital that invoice factoring can.
About The Author:
Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.