Maybe you have heard that by utilizing your outstanding invoices as leverage to finance your business you can gain access to much needed capital?
This may make the difference to your business between growing
and moving forward or remaining stagnant and letting the competition pass you
by.
It is pretty simple really, calculating the overall finance
costs vs. not taking advantage of every tool available to get keep your
business moving forward.
First off Invoice financing is pretty transparent, typically
with the majority of respectable business finance companies there are no upfront
fees. There should be no application fees as well. Any company that asks you to
pay for financial background checks etc. is probably a scam or if not an
outright scam then they are the bottom of the professional Invoice Factoring
Barrel.
First off we can look
at the Discount Rate. The Discount Rate is the primary cost of borrowing
money from the finance company. The
industry average is 1.5 % – 5 % of the invoice value per month. Businesses with
larger invoice volume and that have built up a history with the factor can
often qualify for better rates.
2nd there
is the length of time or length of Financing Period. Discount rates are charged at regular intervals
(usually monthly), so the length of time it takes for the customer to pay your
invoice will determine your cost.
Here is a Working
Example of Invoice Financing Costs. Let’s illustrate the terms above with
an example. Suppose you factor a $10,000 invoice at an advance rate of 85% and
a discount rate of 3% per month. In this case, you would receive $8,500
upfront. If your client makes full payment on the invoice in 30 days, the
factor will pay you the remaining $1,200 you are due, bringing the total amount
you receive to $9,700. The remaining $300 is kept by the factor as their fee.
Invoice Financing is not a bank loan, it is pledging
outstanding invoices on completed work or delivered services in exchange for
working capital up front. In this case
you can see that there is no loan to pay back so interest rate formulas do not
apply here.
If you are trying to calculate the borrowing costs you
really have to look at the cost of not having access to working capital.
Let’s say you have a customer that really needs a big supply
of T-Shirts you manufacture the type he needs but with the current equipment
you have you cannot meet the capacity to manufacture his quantity. There is outsourcing,
which is to ask a competitor to supply
you with the amount you cannot supply or there is utilizing your outstanding invoices to obtain the capital needed to purchase equipment necessary to
complete this and or future orders.
It really always comes down to where is your business in it’s
growth stage and are you comfortable with the amount of capital you have
available to take advantage of opportunities when they arise.
If your business has outstanding invoices on completed work or delivered services and you are in need of capital to grow or expand your business contact NorthWest Finance. An easy way to finance your invoices.
Fuel Business Finance
Minneapolis, St Paul and Across the US
612-327-5756
www.businessfinancingfast.com
