Getting Your Business Funded
Getting
Your Business
Funded
A Publication of
www.overnitecapital.com
Getting Your Business Funded
TABLE OF CONTENTS
Introduction............................................................................................................................3
Chapter 1 - What Is Factoring?............................................................................................. 4
A step by step example..........................................................................................5
Who uses factoring?...............................................................................................6
Chapter 2 - Advantages of Factoring?...................................................................................7
Immediate cash..................................................................................................... 8
Help with burdensome business functions............................................................8
Chapter 3 - Differences Between Factoring and Traditional Finacing Methods..................10
A bank isnt always available................................................................................11
Nothing to repay.................................................................................................. 11
Conclusion............................................................................................................................12
About Overnite Capital.........................................................................................................13
Contact Us...........................................................................................................................14
www.overnitecapital.com
Getting Your Business Funded
INTRODUCTION
Every business must contend with the problem of generating enough capital to
maintain proper company operations and finance opportunities for expansion.
When cash isnt readily available, many organizations have recourse to a number of
financing options that can provide them with the funds they needbut these
options tend to have their drawbacks. Some financing methods, such as bank
loans, may be unobtainable for struggling companies, while other options, such as
equity-based financing, tend to come with unattractive conditions. However, there
is an often-overlooked financing method that has spiked in popularity over the past
few years, particularly in the small business community. This is factoring.
Factoring is a financing method that has allowed numerous businesses, large and
small, to secure needed funds in a timely manner. The process is simple: The
business simply sells its accounts receivables to a third-party, called a factor, at a
discounted rate. In general, factors are independent firms, although a minority of
them are owned by banks.
Though little-known to the general public, factoring is not a recent innovation; in
fact, it is one of the oldest types of financing available to businesses. Factors
manage billions of dollars in accounts receivables every year. Below well take a
closer look at factoring in greater depth, exploring its benefits and its advantages
over traditional financing methods.
www.overnitecapital.com
Getting Your Business Funded
CHAPTER 1
WHAT IS FACTORING?
Factoring is an arrangement made between two entities: the client that will be
receiving funds, and the financial intermediarythe factorthat supplies the
funds. The factoring process works as follows: The client initiates the process
by offering to sell its outstanding invoices or accounts receivable to the factor.
If the factor accepts the deal (well explore the approval process later), it then
advances the client the majority of the invoices value. The specific percentage
varies, but the client can expect to receive at this point somewhere in the
neighborhood of 70 to 90 percent of the worth of the accounts receivable.
The client is now able to spend the cash on business expenses or virtually
anything else.
After this, the factor goes about collecting the unpaid invoices. Once these
outstanding debts have been collected, the factor then sends the client the
remainder of the owed sum. Keep in mind that the factor does subtract a
transaction fee from the sumthis is how it makes money from the dealbut
the remainder of the collected revenue is sent to the client.
At this point, the transaction has concluded. If all goes well, the client has
eliminated its outstanding invoices and received a substantial amount of money
much sooner than otherwise would have been possible. Meanwhile, the factor
has made a profit due to its transaction fee. Everyone benefits.
www.overnitecapital.com
Getting Your Business Funded
A Step-by-Step Example
Lets say Company X has suddenly incurred some unforeseen expensesa huge
property tax bill, for example. Company X does brisk business and can reasonably
expect to collect a significant amount of revenue in the months to come. In the
next quarter, the company will have more than enough cash to handle the tax bill.
Unfortunately, that tax bill cant wait until the next quarter; its due much sooner.
Company X contacts a factoring company that may be able to provide funding.
To kick off the process, Company X sends the factor all relevant informationthis
may include a list of customers, the companys gross sales in the previous year, the
total amount of its outstanding invoices, and any financing methods already utilized
by the company. After analyzing all important elements, the factor determines that
there is an acceptable level of risk involved in signing a transaction agreement with
Company X.
The factor then purchases $500,000 worth of outstanding invoices from its new
clientbut at this stage, Company X does not receive that entire amount. In this
particular case, the factor has agreed to fund 80% of the invoices value at the
outset. This means that Company X gets $400,000, which it promptly uses to
resolve its tax debt. Incidentally, this whole process has taken place over a very brief
timespan. After verifying the invoices, the factor sent this amount to Company X only
48 hours later.
At this point, the factor assumes the responsibility of collecting the accounts
receivables that it purchased from Company X. Once this has been accomplished,
the factor sends the remaining $100,000 to Company Xminus the factors
transaction fee.
www.overnitecapital.com
Getting Your Business Funded
Who uses Factoring?
As a financing option, factoring isnt widely known to the general public. Those
who have heard about factoring tend to associate its use with large corporations
attempting to optimize their cash flow and/or with struggling businesses in
desperate need of money just to stay afloat. This view is, however, a highly
inaccurate one. Factoring is used by a wide range of businessesand its popularity
is steadily rising. Businesses that utilize factoring include, but are not limited to, the
following types:
Fast-rising young entrepreneurs
that require immediate cash
to finance quickly expanding
operations.
Businesses where Days
Sales Outstanding (DSO) and
open terms of sales are net
30, net 45 or net 60.
Companies
with fast growth
cycles.
www.overnitecapital.com
