Most business owners prefer to receive payments as cash on delivery. Many companies, however, especially SME’s find themselves in a situation where their customers take weeks or even months to process a payment, yet they still have to pay for taxes, employees and honour other contracts. This makes it hard to grow your company when your receivables are stuck somewhere in your clients’ accounts.
In Rwanda’s growing economy, business opportunities are knocking. Yet, often a company cannot take advantage of these opportunities because there is no cash to purchase necessaries or hire someone to deliver the services. Access to finance is the main challenges faced by companies in Rwanda. Local banks will often not finance smaller or medium-sized businesses without credit history or which do not have enough assets to give as collateral. There are also other criteria the banks follow like age of the company, which sector of operation and more.
If you do not meet the eligibility for a loan or line of credit, what do you do then? Factoring is an alternative financial service that may provide you with the stability and breathing space to grow your business. It does this by stabilising your cash flow, which will help you grow without being hindered by lack of working capital.
What Is Factoring?
Similar to invoice factoring or accounts receivables factoring, it is a financial service where a company can sell out its accounts receivables for a fee. A company may choose to sell its pending payment to a third party called a factor for a fee so that they get cash in hand quicker.
Let me help you understand this more deeply. Let’s say you have delivered your goods or services to your customers, normally, you submit invoice and wait to be paid. There are times when your customer takes long without paying you, days or even months, yet you need cash in hand today. In this case, Benefactors Ltd (a factor) can help you buy off that pending invoice and disburse you up to 70% of it in 24 hours and the remaining 30% less a fee to be paid after your customer settles the payment.
Instead of you waiting for to be paid, we wait so that you can continue running your business without stress. This helps you access cash in hand quicker.
Why is this important? Let’s have a look at what you can use factoring for:
1. Honour your commitments on time:
Getting paid as soon you have delivered your services or products means you have working capital in your business. Hence:
2. Take several orders at the same time:
Many companies turn down orders from new companies because the current ones are serviced on credit that they are taking long to pay. When you factor your pending invoices, you have enough cash, and thus no more turning down orders.
3. Avoid taking on loans for short-term and occasional cash needs:
One company owner once told me that taking a bank loan is like being thrown in the ‘extermination camp and you struggle with the escape’. Truly, paying a loan can be stressful, and adds a liability to your balance sheet. Factoring is a flexible alternative where you can factor just the invoices you need to, and only during the months you need:
Factoring can be done for only the invoices you need, or even part of it: Most lines of business experience occasional cash flow challenges. Having an overdraft comes with continuous fees and expenses which you may not want to pay when you only have to dip into it on occasion. With factoring you can sell off just the invoices you need, when you need it, and have no fixed costs for the months you don’t need it
Factoring does not require collateral: Invoice factoring is not a loan. Hence, it does not require collateral. As discussed earlier, it is a selling of an outstanding payment for a fee. This means, even companies with no enough assets collateral can use it. Factoring will in no ways affect your balance sheet.
It is your customer who pays, not you: Your part is to deliver goods or services to your customers and that’s all. It is your customer’s responsibility to pay you, and with factoring you’re simply moving a payment from the future to today. Therefore, the payment comes from your customer as per usual while running your business freely – although the quicker your customer pays, the lower the fee is for you.
4. Access finance without wasting time:
Factoring doesn’t take a lot of time nor does it require a lot of paperwork. On the How-it-works section of this website you can see the specific requirements needed, and they are not many – just enough to give the factor peace of mind that this is a legitimate order and a creditworthy buyer. At BeneFactors we guarantee that you will hear back from us within five working days, and if approved, we disburse the you the money within 24 hours of signing contracts.
5. Diversity your product range:
You may have identified a market for introducing a new product – but what it goes wrong? Taking a risk on a new product line or investing in additional equipment may put stress on your existing business when you take cash out to pursue the new venture. With factoring you can rest assured that taking out some cash from your existing business won’t kill it – even if you are hit by unexpected expenses or payment delays, factoring will be there to cover you, giving you peace of mind to explore your new venture.
So tell me, what would you do if you did not have to worry about cash flow?