BIZTIPS - July 1, 2005
Biz Tips: More Than One Way to Receive
Sunday, July 1, 2005
By Art Hill
It’s true – instructors can learn more from their students than the other way around. A business owner in our new Empresarios Latinos workshop told us that he had used factoring as part of his operations funding. That brought a puzzled look to a lot of faces.
Isn’t factoring something we had to do in high school math? Well, yes and no. The factoring we’re talking about here is business borrowing against outstanding receivables. That’s a bit of a pun, because to borrow against your receivables (invoices that have been billed but not yet paid by your customers) those receivables have to be at least high quality if not outstanding quality. According to Rex Baker, Senior Load Officer with the Greater Eastern Oregon Development Corporation, banks that lend based on receivables typically consider 50% of your total receivables lendable – especially invoices due in 30 days or less if that’s customary in your industry. Those invoices are the highest quality because they’re the most likely to be paid!
You can probably see where we’re headed here – not every business has receivables, let alone high quality receivables, but many do, and yours may be one of them. Medical practices know that most patients pay within a reasonable time period, and while insurance payments may not come back quickly or for the full amount billed, at least there’s a predictable pattern of payment that a lender can compare to national trends for the industry.
Whether you are a landscaper, an auto repair shop, or supplier to large companies – you know who pays quickly and who doesn’t. I like to categorize customers as A’s, B’s and C’s. A’s pay within the invoice terms (10 days, 30 days, etc.). B’s usually go longer, and C’s sometimes take a call or two, or make partial payments. I also recommend that any below “C” should be required to pre-pay in cash, or be dropped as a client.
One other thing – whether you’re borrowing against receivables or just planning your monthly business budget, remember that you record the invoice amount as revenue on your books as soon as you issue the invoice, but you don’t get the cash until the customer pays. That might seem obvious, but unless you do careful cash flow planning, you’ll wind up using your savings or credit cards to get you through until the checks arrive. That’s OK in a pinch, but can be a big yellow flag if it happens regularly.
Check the following website for more information on receivables borrowing or factoring www.sba.gov. Type “factoring” in the search window at the top of the page, then click on “The Role of Factoring as a Source of Funding.”
By the way, once the business owner in our workshop got rolling, he had a reliable flow of payments to fund his operations. But his first experience with receivables brought a couple of surprises you can avoid. Plan your cash flow, manage customer payment patterns, and consider factoring as a sound source of funding if it’s appropriate to your business. Oh, and have a great Independence Day holiday!
Content © 2005 East Oregonian