Receivables Financing - Benefits 2
The previous article on the benefits of consumer contract financing was concluded by citing three specific benefits associated with factoring consumer contracts (ie. financing consumer receivables, retail installment contracts, consumer notes, etc.). Those three benefits were: bad debt elimination, consumer contract processing and meeting increase demand. There are many other benefits associated with receivables financing which will be mentioned in this article.
- You can take advantage of early payment discounts. Receivables financing may very well allow you to take advantage of early payment terms offered by your suppliers. By enhancing your cash flow through consumer receivables financing you may be able to save two percent of your raw materials cost because you will have the cash to pay bills withing ten days. This in turn can reduce your financing costs.
- You can take advantage of volume discounts. Another advantage, for example, of financing your retail installment contracts, is that you will be able to buy in greater volume from your suppliers because of your improved cash flow position. By cashing out your retail installment contracts withing days after the contracts are written, rather than waiting one, two or even three years or more to be paid, you will be able to experience first hand the time value of money. Thus, you will be able to take advantage of volume discounts offered by your suppliers.
- You will not be giving up any equity in your company by factoring your receivables in order to provide the capital you need for growth,. Many companies find themselves looking for venture capital, sometimes because they think this is the best or only option they have. However, while venture capital certainly has its advantages, with venture capital you will have to give up equity in your company, as well as take on unwanted partners. Unwanted partners and loss of equity can be avoided entirely by selling your consumer notes; but, maintaining complete ownership of your business.
- You don't incur any debt. When you increase capital through receivables financing, you do not incur debt because factoring is not a loan. This keeps your balance sheet clean, and thereby puts you in a more favorable position than you would otherwise be in, should you opt to apply for a loan or line of credit, sometime later on in the life of your business. Likewise, should you ultimately decide to sell your company, your balance sheet would not reflect debt, since once again, factoring does not involve a loan. What a great way for bad debt elimination!
Therefore, factoring consumer receivables enables you to more effectively build your credit and eliminate bad debt. For example, once you begin financing your consumer receivables, your cash flow will improve. This will enable you to begin to pay your bills on time, and this in turn will position you to establish and/or improve your credit. The logic of this process would be to improve your chances of getting credit terms from suppliers, as well as improving your ability to acquire conventional financing in the future.