Home Based Businesses Can Factor Their Invoices Just Like Big Companies Do!
Factoring is when you sell your invoices to an investor and getpaid immediately, instead of waiting 30-60 days or longer. Homebased businesses can use factors, just like the big guys do. Youhave to remember, though, that factoring is for business tobusiness transactions. It cannot be for jobs you do for privateconsumers.Example: you have a catering business you run out of your ownkitchen, with a helper or two. You cater a party for Mr. andMrs. Johnson for their 25th wedding a...
...nniversary. You can'tfactor that job, because it is to an individual. But when youcater the Christmas party or the 4th of July picnic for Mr. andMrs. Johnson's workers in their machine shop, you can factorthat job because it is to a business. The same is true for cleaning/janitorial businesses: cleaningoffices can be factored, cleaning houses cannot. The same storyfor landscapers: mowing lawns of homes cannot be factored, lawnwork around office buildings can. I could go on and on;photography, remodeling, gift baskets, bakery, tax preparationand almost anything you can imagine. It usually doesn't matterwhat the product or service is, it just has to be a product orservice that is delivered and billed to a business. The credit worthiness of your customer is the most importantthing the investors look at to decide if they will purchase yourinvoices. Your financial health and history will be looked at,but the decision is based mostly on your customer's credit. You will have to show an A/R aging report of some sort. If youuse QuickBooks or a spreadsheet it is easy to generate a report.This shows the history of the payments: the day you invoiced abusiness and the day they paid. Receivables that are paid in30-45 days are much more inviting for a factor than the onesthat are paid in 90 days. When you turn in the invoice to the factor, you receive anadvance of 75%-85% and you'll get the rest of the invoice amountwhen that bill is paid, minus a small fee. The fee for monthlyvolumes of less than $10,000 will be higher than larger monthlyamounts. Fees for payments made past 45 days are higher thanshort term payments. Fees for a lot of very small invoices eachweek or month might be higher too, since there is much more workfor the factor to do. (Each invoice is verified.) Often, yourcustomer will allow you to put several jobs on one invoice, thiswill be easier for the factor and probably for you and yourcustomer.If you factor invoices and get paid right away, just think whatyou could do: pay your bills earlier and build your credit, buymore advertising, purchase supplies for your next jobs, getquantity or early payment discounts from your suppliers, hiremore help. Your business, regardless of how large the monthly billingbecomes, can always remain home based. It does not have to be inan office building, especially with the ease of communication wehave now. It is often a good idea to have your businessincorporated or registered as an LLC, since this gives you someliability protection. Ask your cashflow broker for advice. A good broker will havechoices and suggestions for you and work with some factors whowork exclusively with small businesses. Many factors have amonthly minimum of about $25,000, but there are some whospecialize in small businesses that generate much less thanthat. If you decide to try purchase order financing, it is a littledifferent. The purchase order probably should be at least$25,000 for a funder to be interested. It is also moreexpensive, since you have to pay a fee for this money and thenfactor the invoice when you issue it and also pay the factor'sfee. Many businesses do this rather than refuse a big purchaseorder. It will often lead to many more jobs and in the long runcould be very beneficial. As they say, "80% of something isbetter than 100% of nothing". Obviously you have to have a verygood profit margin in this job, or plan to make less on this onein order to get the next orders from your customer.Don't think that factoring is only for big companies, theystarted as small companies at one point and there is a goodchance factoring helped them become the big companies they aretoday.
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