All about business

The new year is starting off with tough economic challenges, especially for small to medium sized businesses. The U.S. budget deficit is projected to widen to $1.186 trillion, and even with a much needed economic-recovery package, there will be more layoffs and downsizing.

More than ever before, small business owners must be quick to put plans for the New Year into works in order to save money and maintain cash flow during these tough times. What's more, obtaining loans from banks and other traditional financial sources can be a tedius and often frustrating process.

The good news is that today's business owners and managers do have some alternatives to traditional financing. There is one strategy known as invoice factoring.

Factoring is when a business sells its accounts receivable invoices at a discount, and it is different from a bank loan. Banks base their decisions on a company's credit worthiness, whereas factoring is based on the value of the receivables. Plus,factoring is not a loan - it is the purchase of a financial asset, or the receivable. Bank loans involve two parties, while factoring involves three parties.

Factoring should not be confused with invoice discounting, because factoring is the sale of receivables. Invoice discounting is borrowing where the receivable is used as collateral.

There are three parties involved in factoring including: the one who sells the receivable, the debtor, and the factor or factoring company. A receivable is basically a financial asset associated with the debtor's liability to pay money owed to the seller. It is usually money that is owed for professional services or products that have been sold. The seller sells one (spot or single invoice factoring) or more of its invoices (the receivables) at a discount to the third party. Then the factor obtains the cash, so in essence, the sale of the receivables essentially transfers ownership to the factor, who obtains all of the rights and risks.

It is impiortant for small businesses to learn how to manage their cash flow. Usually, more sales means increased cash flow, but when these sales are based on credit, when sales increase, only the accounts receivable increase. As small businesses inventories are depleted after the holidays, and receivables can't be collected until 30, 60 or 90 days later, cash reserves are low.

Here are some tips for managing cash flow:

- Billing, collections and payables systems must be efficient.
- Watch your customer's credit limits.
- Work out New Year settlements with debtors.
- Share credit terms upfront with clients.
- Review and/or add a cash flow management system.
- Watch overdue accounts closely.
- Manage your own payables and wait as long as you can to pay without late fees.
- Also known as accounts receivable factoring, invoice factoring speeds up cash flow.

Kristin Gabriel is a social media marketing consultant who works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. The company provides short-term financial resources including invoice factoring, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in accounting, finance, law, marketing and banking. www.ifgnetwork.com

Article Source: ArticlesBase.com - Tough Economic Times Call for Invoice Factoring