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The IFG Solution
What is Invoice Discounting?
Invoice discounting is an internationally accepted
financial service that dates back to the mid-1600's. It is a relatively
simple process that involves the sale of an account receivable,
represented by an unpaid invoice, at a price of less than 100% of
the invoiced amount.
Invoice discounting should not be confused with
"full line" factoring, a comprehensive financial program
that involves the administration of a business’ accounts receivable
as well as secured debt financing based on the outstanding amount
of current receivables that meet certain lending criteria. Full
line factoring often involves contracts for periods of one year
or longer and minimums for the monthly volume of receivables to
be factored.
Because invoice discounting often involves the
purchase of select accounts receivable, without long-term commitments
or recurring monthly minimums, it is sometimes referred to as “spot
factoring.”
Long Cash Conversion Cycles May Result in Working
Capital Shortages
A supplier of goods and/or services has a cash
conversion cycle that begins when it receives an order from its
customer. Goods are either manufactured upon order or delivered
from inventory; services are provided using an inventory of ready
employees and contractors. Goods sold from inventory must often
be replenished by the manufacture or acquisition of new goods; employees
and contractors providing services must be paid. The supplier often
incurs and pays these costs before it is paid by its customer.
A supplier’s invoices for goods and/or services
usually have 30-day payment terms. However, suppliers often find
that their customers actually take 40 to 45 days to pay their invoices.
During this 40 to 45 day waiting period, the supplier is effectively
financing their customers through its accounts receivable.
As a result, the more business a supplier does,
the more working capital the supplier needs - because every new
sale and delivery ties up working capital evidenced by a new account
receivable.
At times, a supplier may find that it has so much
working capital tied up in accounts receivable that it does not
have sufficient funds to pay the costs to manufacture or acquire
additional goods, to pay employees or contractors to provide additional
services or to make critical capital investments. One solution is
to turn to a bank or “full line” factor. However, a
supplier sometimes does not have access to these conventional lending
sources because, in the case of banks, they do not have a sufficiently
long operating history, a strong balance sheet or a good credit
history or, in the case of factors, they do not have a sufficient
volume of accounts receivables. Or perhaps the supplier knows that
its cash flow problem is short term, and it is not interested in
committing to a financing solution that will involve financing charges
over the long term.
An obvious alternative solution is for the supplier
to convert certain accounts receivable into cash - into working
capital needed to finance the next sale. This is the solution that
The Interface Financial Group® provides.
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