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Factoring/Receivables Finance 101

What is Factoring?

Factoring is a type of debt financing where a business sells its invoices or accounts receivables to a lender (also called ‘factor’). By selling the invoices to the factor, the business can avail cash instantly rather than wait for the stipulated 30-60 days to receive payments from the customer. Factoring is also called Accounts Receivable Financing.

The lender can provide you with an advance against the invoice which can be as much as 80-95% of the invoice amount. Factoring is also one of the fastest types of receivables financing – disbursement takes as little as 24-48 hours. The loan is made against the type of industry you are in, your customer’s credit histories and your company’s sales.

After you have received financing from the lender, your customer pays the complete invoice amount directly to the factor. The factor deducts its fee (for assuming collection risk) and you are paid back the remaining balance on the invoice.

Advantages of Factoring

There are a number of ways in which factoring can be an important financial tool for many businesses, especially for start-ups and young companies. The biggest advantage is that through factoring, you can provide a quick boost to your business cash flow.

Factoring is different from a traditional loan in the way that no debt is assumed in the case of factoring. Through factoring, you can also receive unrestricted funds giving your company a lot of flexibility. This type of financing is ideal to commit to your business’ short-term working capital needs. Factoring is fast and easy – ZoukLoans provides accounts receivables financing in as little as 48 hours.

Here’s an example to illustrate how factoring works:

ABC Transport is a trucking company in Delhi with plans to expand its fleet of trucks and serve more customers in the neighbouring states in the coming two years. ABC Transport recently landed a new client in Rajasthan who needs goods transported between Rajasthan and Punjab.

The client will pay the company in 30 days. ABC Transport finds it difficult to cover the fuel, payroll and maintenance costs of plying that route during the month. The company has faced similar issues before and feel that lack of working capital restricts the company from taking up more business.

ABC Transport goes to a factoring company where they sell the Rajasthan client’s invoice in exchange for an 85% advance on the invoice amount, which they receive within 48 hours of applying. The factoring cash helps the company to run the Rajasthan-Punjab route smoothly, while giving them the flexibility to take up business with new customers as well.

ZoukLoans offers as much as 95% percent of the invoice amount raised through Factoring in a fast and hassle-free manner. To learn more, click HERE or visit us @ www.zoukloans.com.

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Why Keep Your Business and Personal Credit Separate

Why Keep Your Business and Personal Credit Separate

According to several reports on the state of SME finance in India, more than half of small business owners who apply for loans fail to obtain them. Amongst the top reasons for this are poor business and personal credit score and a mismatch between the small business’ and the lender’s priorities.

There are simple and proven ways for entrepreneurs to get what they need for their business. The first step in the direction is to be aware of how personal and business credit scores affect your borrowing capacity. On average, a business owner uses at least 10 times as much credit as a personal consumer. So, it’s almost impossible to run, let alone scale a business, using personal credit only.

By taking steps to build a credit profile for your business, which is separate from your personal profile, you will be able to access as much as 10-50 times more credit than you could through your personal account. This extra capacity can be immensely beneficial for any business’s finance and working capital requirements.

How to get started?

Set up your Business as a Separate Legal Entity

Based on the type, size and sector you are in, your business can be registered as a sole proprietorship, an LLC or a partnership. A quick conversation with your CA/tax advisor will help you determine which legal entity is the best fit for your business and financial circumstances. By doing so, you take the first steps in creating a separate pathway for your business and personal finances. You will be able to move out of your personal liability, and your business will be able to attract investments, avail tax benefits, and build a robust business credit profile.

Register a Business Bank Account

By having a separate banking account for your business account, you can organize your business finances with much more clarity and it allows you to make concerted decisions on where you’re spending. It takes hardly a day to set up an account with your bank. Your business account allows your business to use employee payments as tax deductions from income. You can also show personal income for the purpose of loans, credit lines and taxes. Business lenders will also have a better picture your how your business is performing based on your bank statements.

Build a Business Credit History

After setting up a bank account, apply for a credit card or a business line of credit and ensure that you make repayments on time. By being punctual with your payments, you constantly improve your business’ credit score. Another benefit is that you can deduct interest from a business credit card versus a personal one. By having a line of credit separate from your personal credit, you keep your personal credit profit untouched and are able to strategically put business funds to best use.

Open Vendor Credit Lines

If you business has a network of vendors or suppliers, it is a good idea to open lines of credit with them, alongside your business credit card. It allows you a window of between 15-90 days to pay your suppliers and service vendors. You can open several accounts with various vendors and suppliers you have. By making on-time payments to their suppliers, you contribute directly to your credit health. The biggest advantage of having vendor credit lines is that it allows greater access to credit in the future with better payment and interest terms.

[Learn about supply-chain finance for suppliers and manufacturers HERE]

Check Business Credit Regularly

After putting all of these healthy practises in place, the next step is to continue the momentum and stay on top of your business credit. Banks and lenders, as you continue to grow your relationship with them, will assess your business creditworthiness on a regular basis. If your credit is slumping, your loan terms will be stricter. Or you may find yourself cash-strapped to pay a vendor now rather than after the pre-set payment period. To avoid such problems, all you have to do is check in on your credit health regularly to create milestones and gain an understanding of how all the different types of business credit you have avail are performing and take necessary action when the situation demands it.

[Learn more about why you should regularly check in on your business debt HERE]

ZoukLoans offers debt financing for young and growing businesses based on their performance and profitability. Check out our loan offerings HERE or visit us at www.zoukloans.com

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5 Signs You Could Be Headed for a Cash Crunch

5 Signs You Could Be Headed for a Cash Crunch

All is going well for your business. You have a new string of customers looking for your products and services. Your business’ sales are up and you are profitable – but what does it mean for your business bank account? With a sudden influx or dry spell, any business can be on the brink of a temporary cash crunch. There are a number of accounts payable solutions that you can use to avoid it. Here are five warning signs that may mean that your business may be facing cash flow problems:

Growing too fast

A fast and steady growth is like a problem that an entrepreneur will like to have. However, pragmatically, growing faster than the pace you can handle or growing beyond expectations can cause serious problems to your cash flows. When business grows, it will mean that you will have to hire more help or employees, buy or rent a bigger office or factory to give products and services to your new clients. These changes will need immediate funding. If the profits from your business aren’t enough to pay for the upcoming expenses, you can start worrying about a cash crunch problem.

Delayed payments on bills

It often happens that your customers are taking a long time in making their bill payments, are making partial payments or are delaying payments altogether. Any of these, especially for a small business, can mean a sudden cash crunch – even more so when it reflects a wider financially weak behaviour of your clients. It becomes important to keep an eye on your receivables and to check them on a regular basis. You should put in place a mechanism for due dates of receivables and talk to your customers whenever a payment has not been made on time. Without continuously flow of capital into your business, you can face a temporary shortage of funds that can potential paralyze other functions.

Managing payables

One of the mistakes that business owners often make is that they make payments on their own payables before payments from their customers. This obviously sets you up for a cash strapped situation. You should try to delay payments to your vendors as long as possible while keeping enough cash in the bank to keep your business going. By using automatic payment tools or direct debiting you can make sure that you are making your payments on time and miss deadlines. This will also reflect positively on our overall credit rating.

Working capital cushion

One of the unexpected situations for which small business are ill-prepared are when a major client has suddenly left or has stopped paying on time. If a large chunk of your business depends on this client or clients, it can mean certain doom for your capital requirements to keep the business going. Always communicate with the customers with the biggest invoices and get a commitment for a payment date. Also, in preparation for such a scenario, it will be advisable to get a business line of credit as backup – ideally applied for before the need arises.

Monitoring of cash flows

If you are not keeping a firm eye on your business’ cash flow, you are in for a number of difficulties. Working with multiple clients with varying models of payment – there will be several due dates, payment cycles and cash volumes. You should manage these effectively, identify problems and work proactively towards solving them. By using an accounting software, you can easily generate a financial report and review your financial statements. Make this a regular practice depending on the levels of your business – daily, weekly or fortnightly. By identifying the reasons for your cash crunch and understanding when cash inflows will increase, you should readjust your payment schedule to avoid liquidity issues.

To check out working capital and business loans offered by ZoukLoans, click HERE, or visit us at www.zoukloans.com

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Why You Should Regularly Check in on Your Business Debt

Why You Should Regularly Check in on Your Business Debt

More often than not, business owners go on auto-pilot when it comes to paying off debt. They may have a payment plan, or automatic bank withdrawals that take care of repayment every month, and then they do not give their loans a second thought.

While this is understandably the safe and convenient way to go about paying off your debt, being kept busy by other needs of your business – you may be missing out on an opportunity to put together a better debt repayment strategy that can save you valuable cash.

Here are reasons why a yearly or biannual review of your debt can be helpful for your business:

It takes time to build your credit score. As a young business or entrepreneur, just start out, you are likely to not have a credit history that will qualify you for loans at the best interest rates. This can mean that you owe more interest as you continue to pay off your debt.

However, if you are making on time and steady payments for your loan, your credit score will have also improved. In the future, this means that you qualify for better loan options. It also means that you can pick a better deal on your current loan by refinancing it at a lower rate. Your improved credit score can directly lower your monthly repayments. It is good practice to review this yearly or biannually.

With time, your situation will change significant as your business grows. This will impact the best debt strategy your company should adopt. For instance, if your revenue has steadily grown, you will have a significant amount of cash, which can be used to pay off your debt before time and save on paying extra interest.

Or, if your plans are to expand or diversify your business but do not have sufficient funds, you can glean from your debt review strategies that will let you have access to new and cheaper sources of lending. It will give evidence if you will qualify for new loans or if you have to plan your expansion through other sources.

If you have a healthy and growing credit score and your business’s financial situation has improved, you will also be able to take out a lone of credit – giving you a lot of flexibility in managing your business finances. For instance, if you have taken out a number of loans, you can lower your total repayment by combining them all into one loan.

Another important reason to do a yearly or biannual debt review is to find out if you qualify for new products and loan options that are a closer fit with your business strategy. As you set up relationships with a substantial customer base, built your supply-chain networks, you can have access to innovative new products based on performance.

New businesses typically do not have many assets. However, after the first few years, you would have accumulated valuable assets like inventory and equipment. These can be used as collateral for asset-backed loans – opening new options that will make your qualify for bigger loans and better rates of interest.

Too many businesses are unaware of the important of a yearly or biannual debt review. Presented above are only some of the possible ways in which a debt review makes a better debt repayment strategy. Make sure this doesn’t happen to you; scheduling your debt review yearly or every two years, and find better loan options and products for your business as it continues to grow.

ZoukLoans offers debt financing for young and growing businesses based on their performance and profitability. Check out our loan offerings HERE or visit us at www.zoukloans.com

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Purchase-Order Financing for Suppliers & Manufacturers

How manufacturing & supply-chain businesses can use Purchase-Order Financing to complete new orders

Here’s the situation: You are a small business that sells a cosmetic product. You have been in business two years and sell your product through an e-commerce portal. Your business is making profit and sells 10000 units every month. You get a call from a big retailer who wants to put your product in 100 retail locations. If your product sells, the retailer will take up your product for their locations across the country.

You are excited about the opportunity until you hear that the retailer will require 100,000 units from you by the next month. How do you raise the cash to make the product you sell and fill in this big order?

Use Purchase-Order Financing

As a small business owner, when you need cash up front to complete an order, purchase-order financing is one of the best ways to finance your order and keep your client happy. Purchase-order (PO) financing allows for short-term capital lending that covers the cost of manufacturing and shipping goods.

Purchase order financing involves a bank or lender who pays you, the supplier to manufacture goods that have been ordered to fulfill an order for a customer. This is an advance and will cover as much as 70-80% of the costs. The purchase order finance company will collect the invoice from the end customer and charge the company in need of funds, that is you, a small fee as interest. This fee is taken out of the collected invoice and the remaining amount is returned to the company.

In the above example, the supplier that manufactures the cosmetic product can be paid by a Purchase Order loan that you have brought on board to successfully complete the retailer’s big order. After you have shipped the units and received the invoice, the Purchase Order lender will be paid off by a factor.

Easy, right?

The basic flow of a Purchase Order loans is the same for all business and depends on the moving parts of your business rather than on more traditional parameters. If your business needs inventory to complete a big order and you do not have cash to produce that inventory, Purchase Order financing is an attractive option to handle your cash-flows.

Purchase Order financing can be a great solution for cash-poor small businesses or business that are new and getting started – and those who may find themselves unable to have access to traditional business loans.

Explore Purchase Order Financing options for your business through ZoukLoans an avail the most innovative best-in-market offerings. To learn more, click HERE or visit us at www.zoukloans.com