When you are running a business, you know how difficult it can be to maintain your capital. In these uncertain economic times, very small things can be the difference between a successful business and going under. Many people think that you have to do something wrong or unwise to fall into debt and lose your business, but that’s not the case. Basically, every business carries some debt and the successful maintenance of that debt is usually the definition of a successful business. If you can pay off all of your obligations and also take home some money for yourself, you’re doing pretty well. However, you can lose your business without doing anything wrong.
Debts
Oftentimes, businesses are undone by debt, but not their own. Oftentimes, businesses fail because they have offered too much credit to their customers and the customers cannot pay them back. For example, this might work if you operate a construction company. Here’s how that would work. If you owned a construction company, your contractors would go on certain jobs. In some instances, they might be paid partially upfront, but usually the customer is charged after the job is done. The contractor then hands the customer an invoice. The customer can pay at that moment or wait until a later date to pay. If that customer does not pay off the cost, you’re liable for paying for the materials as well as paying the contractor until the customer pays you. If this happens a lot, then you might find you’ve run out of money to pay your obligations. That’s how a business can quickly get into trouble. So, what do you do?
Discreet Factoring
Invoice discounting, sometimes called discrete factoring, is a form of borrowing that a company can take part in to improve its cash flow. The business, the construction business in the example, would invoice its clients. Then a finance company would pay the company a percentage of the value of the invoices. This percentage is usually in the 80% range. The best companies offer 85%. The company will then keep the remaining 15% of the price of the invoices until the customers pay off their invoices. Obviously, the financing company will keep a small fee so that they too can stay in business. This differs from true factoring, because the original company is still responsible for the debts.
Essentially, the original company borrows a certain amount of money from a lender, but instead of some kind of real estate, the company offers up its invoices as collateral.
Benefits
When you are trying to collect money from your clients, you might just have to wait for those who are dragging their feet. Some of them might have bought more than they can actually pay for, and you’ll have to negotiate a payment plan. Other customers simply have no intention of paying. Whatever the case may be, collecting debts is not easy. It is expensive and time-consuming. These short-term loans can keep your business afloat while you are trying to collect the debts you’re owed.
