Is Invoice Discounting a Loan?

invoice discountign“Is invoice discounting a loan?”

No. That’s as simple as it goes. But then again, answering that question with a singular word and in two characters nonetheless would prove vague and lacking. People need an explanation. They want more insight into the topic to better understand it.

That’s what we’re here for. So if invoice discounting isn’t a loan then what is it? In its simplest definition, this type of receivables financing method allows businesses to raise their needed funding in a short amount of time through their trade receivables resulting from their credit sales.

Keep in mind that sales happen either in cash or in credit. In the case of the latter, it creates invoices which are collectible from the customers to whom they are attached to. The collection period and maturity date as well as the terms and conditions of the transaction depend on the agreement between the parties involved. This means that although considered an asset, they are not available for immediate use. They can lock up cash for a significant period. There are even risks of non-collection dubbed in finance as bad debts and are recorded as losses.

What invoice discounting does is that it allows businesses to advance the value of said receivables prior to their maturity. In other words, they get to receive cash even before collection is completed or even ensues. The amount received is equivalent to the value of the invoice/s. The provider in turn gets to hold the invoice/s as security while the company continues with its operations. Once the business attains full completion from the owing customers, it goes on to pay the provider of the amount advanced plus the fixed fee agreed upon.

Invoice discounting is also praised for its speed. The method can be arranged in a significantly short amount of time, twenty-four hours being the fastest. This is only available to receivables financing methods. Additionally, its ability to hasten collections and free locked up cash within invoices help better cash flows, strengthen working capital and improve liquidity. And all that it can do without the burden of debts.

As we’ve mentioned early on in this article, invoice discounting is no loan or debt or any other form of credit and liability. It isn’t one because it is an asset transaction. The advance creates a decrease in receivables coupled by an increase in cash and a debit to an expense account for the fee.

5 of the Biggest Misconceptions About Spot Factoring

Invoice letter head with pen and calculator / selective focusMisunderstanding, in most cases, is the root of all problems. Our lack of adequate understanding and comprehension about things can cause us to misuse or even brush away the potential of something that would have otherwise been great. Such is the case for spot factoring.

Also known as selective or single invoice factoring, it falls under the category of receivables or invoice financing. As its name suggests, it allows business entities to use their sales invoice to raise needed funds. In this arrangement, the company chooses a specific receivable and advances its value prior to its maturity thereby hastening collections.

Here are a list of the five biggest misconceptions surrounding it.

1. It adds to debt or liability.

Many assume that all types of financing are a loan. Spot factoring begs to differ because it isn’t one. It is, as a matter of fact, a type of asset transaction. The company essentially sells the right to collect from the invoice in exchange for an advance of its value, often upfront and within 24 hours. It reflects in the books as a decrease in receivables and an increase in cash as well as a debit for an expense account regarding the minimal fee. It comes with zero interests and no asset based collateral requirements.

2. It is expensive.

On the contrary, it’s rather cost-effective. The fee is a onetime transaction and comes with a fixed price agreed on by all parties at the onset. Plus, spot factoring is a onetime transaction with no long term contacts involved.

3. It hurts customer-client relationship.

The terms of the credit sale remains the same so there’s no need to worry about client fallout due to factoring. The collection function may be transferred to the provider but these are professionals trained in the craft.

4. It’s too much of a hassle.

On the contrary, it’s one of the easiest to process. Providers don’t even require or check credit score because it’s not a debt to begin with. There are lesser papers to submit and it can be processed in a matter of 24 hours. What hassles are we talking about?

5. Only established entities can use it.

What’s great about spot factoring is that it’s non-discriminatory in the sense that any business entity regardless of size and industry can make use of it from conglomerates to small and medium scale enterprises to startups and even recovering entities.

Things to Consider When Choosing an Export Finance Option

Alternative public financing and export assistance helps small businesses increase their international tradeExporting is a risk but it’s also an opportunity. This is why more and more business entities are venturing out into the international market. But because this move demands more time, more effort, more work and more resources, it’s pretty rational as to why more entities are also seeking export finance options.

However we can all agree that even that is a chore on its own. Not only are there several options which can be pretty overwhelming but we all have varying needs and circumstances. What works for one may not work for others and vice versa. So how do we even pick? What should we consider? We give you a list. Here, check it out and take a look for yourself.

  1. Business Type – The industry and size of your business matters. Let’s admit that there are some options that may not even be available to smaller entities that do not have adequate assets yet. It is important to gauge options while putting oneself at the situation. Know their requirements first.
  2. Purpose – Why do you need it and what for? Options also come in various types and these are uniquely designed to satisfy a certain purpose or function. For instance, others are meant for acquiring a real estate property while there are those that are meant for immediate short term liquidity needs.
  3. Financial Capacity – Know how much you need and you are capable of borrowing and raising. Each business entity has varying capacities when we talk money. Also identify their source. Some export financing are through credit while others are more of an asset transaction.
  4. Length of Term – Apart from satisfying different needs and catering to varying types of industries and sizes of businesses, export finance options also come in either a short term or a long term period. The former takes a few weeks to three years while the latter goes far beyond even reaching up to twenty or more.
  5. Costs – Choosing a type of financing, let alone using one comes with costs either as a fixed rate or as an interest. Each provider also offers varying levels of such costs so make it a point to inquire and look around.

But after finding which export finance solutions works best for your business, what’s next? Of course, you’ll have to look for the best provider but that’s an article for another day.

Single Invoice Factoring, Liquidity and Funds

InvoicingWhen liquidity isn’t exactly pristine and immediate funds are on a low, single invoice factoring serves as the first line of defense for many entrepreneurs and businesses. The financing method has long since allowed entities to derive quick cash without the burden of debts during pressing situations. Today, we’ll discuss more about what it is, what it does and how it paves the way for operational continuity.

You see, liquidity is something that businesses are always concerned about. It refers to the amount of assets that can be easily and readily converted to cash or used as such. The challenge often presents itself as companies find that although solvent and profitable, their assets aren’t exactly liquid. While part of cash is retained for specific uses, others are locked up as inventory, receivables or fixed assets. This makes immediate disbursements difficult if not impossible to do. It also raises issues in terms of cash flow and working capital. In order to prevent more serious issues, single invoice factoring is utilized.

The method is a onetime transaction that allows a business to select a specific customer invoice in its receivable pool from which to draw funds from. Its value, often around 80% to 95%, is advanced and received at present even before the invoice itself matures. In other words, collection is hastened and so is the realization of cash. This alone improves liquidity and allows the business entity to make use of the resources as needed.

The remaining percentage shall be withheld by the provider, referred to as the factor, until the invoice matures and they are able to collect in full from the owing customer. Upon completion of payment, the balance less fees shall be forwarded to the company.

The method’s birth came after financing institutions realized that many companies suffer from liquidity issues and cash shortages due to their sales on credit that translate to receivables. They may be assets if we look at them at an accounting standpoint but essentially, they lock them up for periods and make them unavailable for use which can mean trouble in pressing situations.

What makes single invoice factoring a very powerful and useful tool is the fact that it allows for haste. Providers can arrange for and release the funds in as fast as twenty-four hours which is something no other financing method is able to do. Moreover, it is one that involves zero liabilities as it is no debt or borrowing therefore it comes free of interests and the accompanying property collateral.

When Spot Factoring Companies Become a Good Idea

spot-factoring-companiesSpot factoring companies offer one of the two main types of receivables finance. They allow business entities to draw immediate funds from a specific invoice thereby hastening the collection and allowing for the receipt of cash even before actual maturity and payment collection transpires.

We all know that money is the lifeblood of any organization and without it, operations cannot push through. After all raw materials and labor need to be funded. Nope, they do not come for free. But when does involving the service of spot factoring companies become imminent and fruitful? We’ve listed down five scenarios below. Take a look.

Scenario # 1: Opportunity Loss

In business, a missed opportunity can tantamount to financial losses. But even if an entity wants to grab the chance, it can be hindered by its lack of resources or inadequacy of unrestricted liquid funds. This is a very common issue among many entrepreneurs in the world today. But with the help of spot factoring, this need not be the case anymore.

Scenario # 2: Cash Flow Deficit

Sales are not the sole driver of success. Oftentimes, a sale does not equate to cash given the presence of credit that creates receivables instead. Although an asset, receivables lock up cash within invoices up until they mature and payment is collected. This can create a negative impact on the business in terms of liquidity. To hasten collections and improve liquidity without eradicating credit sales, spot factoring can be employed.

Scenario # 3: Property Collateral

Unlike other financial institutions and providers, spot factoring companies do not require property collateral nor do they entail interest as the service is first and foremost not a debt or any other type of liability. This makes them available and reachable even t small and medium scale enterprises, startup companies and recovering entities.

Scenario # 4: Expense Averse

Since factoring invoices do not come with interest and collateral, it’s a more affordable type of financing as compared to other more popular alternatives. Moreover, its requirements are less expansive and meticulous thus the ease and convenience.

Scenario # 5: Time Constraint

Spot factoring companies also serve as any entrepreneur’s best friend in times when immediate cash is needed such as during emergency disbursements. Since these providers can release funds in as fast as twenty-four hours, they are unlike any other financing method available in the market. They run at the speed of light, figuratively that is.

Spot Factoring Companies Explained

Effectively Managing Your Export Funding Resources

export fundingExport funding has paved the path for many businesses to venture into the world market but despite its effectivity and benefits, the end results still depend on how said businesses will make wise use of the resources acquired from it.

After all, cash is a depleting resource and in order to make the most out of it one has to make good and smart use of it. To help you go with such endeavor, here are some foolproof ways to ensure that you get to maximize and stretch out the spending power of your export funding resources.

Create a mighty budget. – Simply put, a financial plan guides business owners in allocating their available resources to each and every one of their expense items. This likewise prevents any shortage or unmatched cash and disbursements. Always have a budget made for very fiscal period.

Examine your expenditures. – Are all of them necessary? Are the amounts accurate? You have to carefully analyze all of your expenses so you can adjust your spending accordingly and also scrape out or decrease costs on those that are not creating value or contributing to it.

Do away with impulse. – Every act must come with a sufficient and valid purpose and not merely out of impulse. Gathering or acquiring funding is not easy so waste shall be minimized at all costs. To prevent any unnecessary depletion of resources, export companies must have rules and limitations set down to avoid rabid actions and decisions on a whim.

Maintain an accounting of all transactions. – Records are kept not only for legal requirements and law conformity but also for purposes of tracking down the inflow and outflow of your resources. This shall allow you to see how cash in the business are being spent and whether or not efforts are actually creating value and not losses. This makes it important to have a solid accounting system, process and rules within the entity as well as a qualified team for the task. This applies not only to the cash you received from export funding but for the overall assets in general.

Know your sources of funds. – Different companies in various industries make use of a combination of various financing resources apart from export funding such as but are not limited to capital equity, income and profits, business cash advance, receivables finance and credit. By knowing your sources, how they work, what they bring, their pros, consequences and availability, you can better budget and apportion your assets so that they work together.

Situations that Call for Single Invoice Discounting

Money is the lifeblood by which businesses run. Sure there are other factors needed to put things into play, labor for instance, but we could all agree that finances play a pivotal role in setting any entrepreneurial endeavor. This is why owners have to be smart when it comes to choosing the financing options to be used for every situation. Let’s get into those choices starting off with single invoice discounting.

Single invoice discounting is simply the act of advancing the value of a specific trade receivable, often with a significant value, and receiving the cash prior to its maturity and before collections is completed. The invoice in this situation shall be used as a form of security by the provider. After the invoice matures and cash has been collected against it by the company, it shall then repay the provider for the amount advanced plus the fees.

There are a lot of situations for which entrepreneurs find the method handy. Here are just some of them.

  • When Credit Isn’t Practical or Possible – It is important to take note that single invoice discounting is not a loan or any other form of liability. In fact it does not even involve property collateral for that matter or interest. This makes it the perfect choice for entities that cannot afford to take on a debt or who find it impractical and expensive. It’s also great for startups and small enterprises who do not yet have ample assets to be garnered a mortgage or bank loan.
  • When Time is of the Essence – The method is rather fast compared to other financing options. Many providers can facilitate the process and release cash within 24 hours thus enabling companies in need of immediate funds a means to provide for their needs, for example emergency expenditures or sudden opportunities. It is also because of this that the cash flows experience a quick injection allowing for better liquidity and stronger working capital.
  • When a Receivable is Too Valuable – Sometimes, a receivable or invoice is so significantly valued that the longer it remains as is, the higher the threats to liquidity and the higher the risk of bad debts. Plus, it’s never attractive for companies to have massive amounts of outstanding receivables. It’s too risky and it traps a massive amount of cash within the invoice leaving it unavailable for use either in operations or for reinvestment purposes. Single invoice discounting helps avoid these situations.

Export Finance and the Pursuit of International Growth

exportIn its simplest sense, to export means to send goods for sale or exchange to other countries or territories. Businesses as a whole have continually strived for growth not only domestically but also internationally. It is also for the same reasons why methods like export finance have skyrocketed into popularity and efficacy for the past years.

But what is it that brings entrepreneurs to continually dream of global success? The answer is obvious but for the sake of discussion, we’re breaking them into 7 reasons as follows.

#1: MARKET – Domestic markets are no doubt smaller in comparison. Going beyond borders, this means getting the opportunity to offer one’s brand and products to a larger audience. A company’s audience in a specific place is very limiting, exporting maximizes that number.

#2: SALES – With a bigger market and more customers, the business is to experience an increase in sales. Think about it. If a phone company releases a new model in a certain country and let’s says for the sake of discussion that everyone buys it, the trade stops as the last person without one makes their purchase. There’s a limit. By exporting, one gets to venture and tap other foreign markets.

#3: PROFIT – As sales rise up, the expenses or costs are eventually ruled out to reveal an increase in profits over time. This is the primary reason why entrepreneurs want to export. It’s income.

#4: GROWTH – With the numbers on the rise, growth is imminent. What business owner wouldn’t want that? This is true regardless of industry. Think about it. From a home-grown to a global brand, what a dream!

#5: COSTS – Equipment and resources are maximized when one chooses to export. Machineries get to produce at their full potential thus generating more output. Why is this good? Assets depreciate over time regardless of how much is being produced. Moreover, the more output generated in production, the lower the per unit cost becomes.

#6: LOSSES – Exporting helps reduce seasonal losses which a lot of companies tend to suffer. For instance, a clothing company’s summer line may already be passé in a certain market but it still to be introduced at a foreign one. Moreover, this helps lengthen the life cycle of one’s products.

#7: RISKS – With export finance and international trade, risks are better diversified. This is because markets behave differently and what may be a loss in one may not constitute the other.

The Advantages of Using Spot Factoring Versus a Loan

spot-factoringSpot factoring refers to a type of receivables finance that allows business entities to choose and draw cash from a particular customer invoice by virtue of advancing its value in exchange for the right to collect against it.

A loan on the other hand is an amount of money lent from an individual or a financing institution such as a bank with the premise that it shall be paid back within a span of time and with added interest.

Businesses and entrepreneurs have opted to use spot factoring over loans for a number of reasons, mainly in favor of the advantages that it brings. To learn more about said benefits, take a look and read on below.

  • It’s very fast. – Too fast in fact in contrast to the other financing methods out there. Many providers are able to approve and release the cash in as fast as twenty four hours. This makes it a very effective alternative during emergency and immediate needs.
  • It shifts the burden. – As previously mentioned, the advance received is in exchange of the right to the invoice’s collection. In other words, the provider shall now bear the responsibility of collecting from the customers to whom the invoice is attached to. This not only relieves companies of the job but also in a way saves them from the administrative costs of doing so.
  • The costs are rather cheap. – Because spot factoring is a onetime transaction and involves a receivable chosen in particular by the company itself, the fee is pretty affordable. It only applies to the said invoice and does not hold the company to any long term agreement or contract.
  • It hastens the collection. – Businesses need no longer have to wait until the invoice matures so that they can recognize and use cash attributed to it which now brings us to the next item on our list.
  • Cash flow and working capital is improved. – As cash is freed up, an immediate injection enters the system thus helping improve cash flow levels and working capital strength. Furthermore, it helps improve liquidity.
  • Spot factoring is not a debt. – Last and definitely not the least, it is not a debt and therefore not a loan either. The method is an asset transaction which when used shall decrease trade receivables and increase cash in the books. An expense account will also be credited to record the minimal fee involved but liabilities shall remain untouched so as interests.

Finding Your Export Overdraft Provider

export overdraftOne of the best weapons when it comes to international trade would have to be the export overdraft. This financing method has given aid to many startups, small to mediums scale enterprises, businesses in recovery and even established organizations in their pursuit of bringing their products to a bigger audience and trading overseas.

Export overdraft has been celebrated for its ability to unburden companies of the meticulous documentation requirements, payment lags, collection complications, complex legislations, as well as the financial risks that come with foreign transactions. Simply put, it makes exporters, or those planning to do so, take their businesses into the worldwide market without much of the setbacks that often hound it. Its benefits abound to say the least which is why it has been widely used.

However to truly enjoy the said perks, companies must make sure to work with only the best export overdraft providers. Finding them is crucial and to do that, the following must be done.

  • Always seek for quality – Make sure to do an extensive research on the available providers in the area. Do not jump and hire the first company that pops into the list. Find those that can provide and tailor suit their services to their client’s needs. Find those that uphold best practices and who are experienced enough to handle foreign trade.
  • Be industry sensitive. – It is much better to seek an export overdraft provider that has adequate experience or which specializes in the industry that the business falls under. It gives the company an upper hand because expertise and experience shall not only ensure better quality but it will also pave the way for a more direct and specific service.
  • Seek for opinions. – Recommendations should be welcomed. In fact, it would be best to ask around be it friends, colleagues, employees, vendors or relatives. If there’s someone they’d recommend and share an experience about then take it. Moreover, read relevant sites, blogs and forums to see discussions and reviews regarding particular providers. All these will be helpful in the search but do take them with a grain of salt.
  • Ask help from Google. – When all else fails, type in the right search terms on the browser and a long list of options would flood the screen. Just be sure to run a thorough check and research about said export overdraft providers before hiring them for the job.