Invoice factoring: Is it right for your company?

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By Floyd Davis

This article is going to show how a business can basically wash its hands of the messy and costly task of managing accounts receivable. For large businesses, the accounts receivable (AR) department is a large unit of the company employing teams of accountants and clerical workers. They work to keep straight all that has to do with invoicing the clients and keeping track of the payments they make.  They may even run a call center, manage the customer service portion of the company's website, and otherwise provide customer service to vendors who owe money.

This guide will show why this entire AR department can be outsourced, and how this will result in faster cash inflow for the business. If there had to be a one sentence summary of what  invoice factoring is, it would be:

Outsource your accounts receivable to a third party company who will pay you a portion to up front for the invoices for a fee.

Invoice factoring as a way to raise capital for business expansion is not a new business technique, but it's often overlooked. Now, with credit more difficult to obtain, small businesses are investigating invoice factoring as a way to quickly and easily raise cash for working capital requirements.

Approval for bank loans for small businesses is difficult to come by, as loan requirements get stiffer and stiffer in the post- credit crisis world. Bank loans also require application fees, lengthy application procedures, and lots of paperwork and preparation. And don't forget the interest on a bank loan.

Invoice factoring is better than a loan

Invoice factoring compares favorably to a small business loan from a bank in all these aspects, which is why it's a fast-growing segment of the business world.

Incurring debt with a small business loan is not always a sound option. There's risk involved with any type of loan. Unfortunately, it's just how business is done if expansion is in the works.  Few small businesses have extra cash on hand for major improvements or expansion. Taking on a loan is common.

Invoice factoring, on the other hand, involves no long term commitment, no chance of defaulting since it's not a loan, and no up front fees commonly associated with a bank loan. The business simply sells its invoices, receives cash for them, and the transaction is finished. The downside is that only a percentage of each total invoice is received. The rest goes to the invoice factoring company, which is the only fee the business pays. Having cash on hand quickly and removing the uncertainty of unpaid accounts receivable are the rewards of working with an invoice factoring company.

Freight bill funding

If you are a transportation company with a cash flow problem then freight bill funding might be of interest. It's jut like invoice factoring but it's for the transportation industry. One big difference is that with freight bill funding, clients can receive their funding in the form of a fuel card.  The fuel cards can then be used by the truckers in the company like ATM cards.

Fuel cards are accepted all over the country at thousands of locations, just like ATM cards. Fuel is a company expense, so having truckers use the fuel cards which are funded by freight bill funding is very convenient for the transportation company that uses the service. Trucking companies need constant cash flow because of their fuel charges, so using the Fuel Cards puts cash in the hands of the people who need it.

Floyd Davis is a blogger for the finance industry and more of his articles can be seen at irsrefund.biz

Advantages and disadvantages of loans for people with bad credit

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You are in a desperate need of immediate cash, which has made you run from pillar to post to get a loan. However, your credit history depicts you as a poor payer or a defaulter and being short of money you find yourself in the doldrums as you can see no escape from the emergency that you are in. 

If you have bad credit and need  loan you are not alone and there are many like you who find themselves in such a crisis. Thus, in view of such borrowers, many lenders in the financial marketplace have resorted to providing loans for people with bad credit. However, before you take the plunge to apply for a bad credit loan, take a look at the advantages and disadvantages of the same.

Advantages of bad credit loans

No issues with bad credit history- The best part of bad credit loans is that you need not worry about your past credit record since the lenders do not bother about such things. Instead, they look at the capacity of the applicants to repay the loan in future, unlike conventional methods of lending where the past financial record forms one of the main factors on the basis of which a loan may be out rightly rejected.

Fast approval- While personal loans applied in the conventional methods are hard to get approved; approval rates for bad credit loans are much higher ranging from 80 to 90 per cent.

Building credit score- Even if you have had issues with your credit score before on grounds of being a defaulter in repaying the dues, obtaining a bad credit loan gives you the opportunity to re-build the same. By timely and regular repayment of the loan amount, you can improve your credit score, thereby building a strong financial standing.

Large amounts- Bad credit loans also have the advantage of lending you higher amounts in a short span of time, although higher the amount, higher will be the interest that you have to pay.

Disadvantages of bad credit loans:

High interest rates- Lenders giving out loans to those having a bad credit history, in lieu of the high rate of approval and fast unsecured personal loan, charge rates of interests which are much higher than the normal ones. This is a sort of security, with which the lenders arm themselves in exchange for giving out bad credit loans.

Unsecure provider- Since the system does not come with a guarantee, often people applying for bad credit loans fall into the trap of going for the wrong lender.

Finally, if you apply for loans for people with bad credit, you need to be sure of being able to repay it timely to avoid being entangled into a vicious cycle of debt.

Guest post: 5 things to look for in a lending network

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By: Amy Zimmerman

Over the last few years, getting financing for business projects has become a herculean task. In fact, even getting short term financing to repay debts since the global recession in 2007 is an arduous task. Most traditional financial institutions have introduced stringent measures which leave most borrowers out. Amidst this backdrop, lending networks have developed to fill in a gap left by traditional financing options.

If you are struggling to finance your business or you are in search of a quick loan, getting an insight on 5 things to look in a lending network is imperative.

What are some of the benefits you get from such a network? For starters, a lending network provides an easier financing option because the time spent since application to the point of getting cash is shorter. This convenience is compounded by the fact that interest rates on financing are lower than in traditional institutions as reported by CBS in 2008. In most cases, you can even get better rates to refinance your mortgage and other debts which is a much needed reprieve in the current economic doldrums.

A lending network can either consist of peers or even lending institutions which have large networks such as banks and lending programs which will suit any customer's needs. With so many of these groups around, what are some of the 5 things to look in a lending network?

Type of services offered

Everyone has unique needs and as such, the lending network you choose must offer a wide range of services. These range from refinancing options, mortgages, auto loans, bad credit facilities, short loans among many others. Moreover, if you want to join as a lender, then the network should also be ready to absorb you.

Reputation

One of the most important among the main 5 things to look in a lending network is of course its integrity and prudence in financial dealings. Many networks have featured in the news for all the wrong reasons and hence, research and read reviews and testimonials from past clients. Check your local BBB to learn of any complaints regarding the service, especially on professional conduct.

Experience

Evaluate the company's record in the financial industry to ensure they have the expertise to manage a financial portfolio. Check the company's website and evaluate staff training and individual experience in the industry before committing to work with the network. You can also look at its partners in the financial sector to ascertain whether the network is a stable financing option.

Privacy policy

Check your lending network's privacy measures to ensure it has a stringent policy. This will reduce the risk of losing your personal and financial information especially in the contemporary internet world where hackers abound.

Customer service

In most cases, you will have looked far and wide for a good financing option and hence, a lending network with dedicated, informed and sympathetic staff will definitely be the best option. Unhelpful customer service is an indicator of a more deep rooted problem in terms of the network's working ethics and practices. As such, move on if you are no comfortable with the kind of assistance provided.
Other considerations include the interest rates, licensure and other requirements. One crucial aspect among the main 5 things to look in a lending network is of course the nature of eligibility requirements. If they are overly stringent, then keep looking.

Amy Zimmerman regularly reviews online lending services. Be sure to look into the trustworthy report on Lending Club at Lending Club scam to make a clever financial judgment regarding this service.

Different kinds of bank loans for small U.S. businesses

Small Businesses may obtain financing for various aspects of business operations through specialized bank loan products. This article will illustrate the various types of loans available to business owners through banks in addition to indicating how such loans can be approved. A discussion of a few banks and their loan products will also be provided for the purpose of further illustrating the types of loans available.

Types of bank loan products

• Lines of credit

A line of credit may be either a secured or unsecured account i.e. collateralized loan or uncollateralized loan. Lines of credit are similar to credit cards but usually have interest rates based on the prime rate and are thus lower. Lines of credit are more flexible than credit cards because they also act like accounts and checks can be written against them.

• Cash flow loans

Cash flow loans are used to finance periods of time within the cash conversion cycle. In other words, the time between providing a service, invoicing, and receiving the payment and then paying creditors. The shorter the cash conversion cycle is the more money a business can save in cash flow expenses such as interest on the cash flow loan or other source of credit. Companies that operate on a cash basis may not have the same requirements for cash flow as a business using the accrual method of accounting.

• Business credit card

Business Credit Cards have higher interest rates but can be used for solid bookkeeping. The reason credit card loans are good for bookkeeping is all the transactions are recorded electronically, immediately or soon after the expense has been charged. This can lower accounting expenses as some of the financial reporting is included as a service of the loan.

• Debt refinancing loan

Banks also offer debt refinancing loans that can consolidate other business debt at a lower interest rate. For example, if company A has 3 credit cards with other banks at an average interest rate of 14%, Bank B may be able to provide a loan refinancing all 3 credit card's debt at a lower interest rate. This allows the bank to acquire new business and the business owner to obtain a lower monthly payment.

• Equipment and machinery loans

Equipment and machinery loans can include vehicles, tractors, conveyor belts, irrigation systems etc. Many types of businesses have unique equipment and/or machinery needs for which these loans are designed for.

• Start up loans/seed capital

Seed capital is a loan used to financing the opening and initial operation of a business. In this case, small business seed loans are applied for and either approved or rejected by the bank. These types of loans can have rigorous application requirements that can be subject to significant scrutiny by the bank. Depending on the type of bank and their specialization, seed capital loans may be easier or 

harder to find.

How to qualify for bank loan products

Qualifying for bank loans depends on several factors including the interest rate of the loan, the type of loan product and the financial and professional credentials of the applicant. The more secure i.e. collateralized, high interest rate loans to clients with good to excellent credit histories and strong business fundamentals are the bank's ideal loan and customer because this provides a low risk of default and high rate of return.

Banks can't always have it there way however, and sometimes competition for loan products can cause interest rates to drop and loan application incentives to be introduced. For example, free services through the bank if a loan is approved. Depending on the type of loan the following criteria may be used when considering a loan application. Naturally, the better an applicant meets the criteria, the more likely the loan will be approved.

•Business Credit Rating

• Balance Sheet Information 

• Financial Ratios ex. Current ratio, profit margin on sales, debt to assets ratio.

• Professionalism and Quality of Application

• Collateralization

• Banking relationship

Banks and bank loan products

There are many banks to choose from with varying loan products. Some banks have specialized loans such as vehicle loans while others may have more general loans. Larger banks have more capital to lend and so obtaining a loan may be easier through a large bank if the loan is for a large amount. A few of the larger U.S. banks that either specialize or write a significant amount of business loans are listed below.

1. Bank Of America: This large U.S. bank has a wide array of business loan products.

2. CIT Coporation: A business friendly bank specializing in business loans.

3. CitiGroup: Another of the larger U.S. banks with large asset resources and loan products

Local banks may not be able to provide the same liquidity and financing as larger banks but they may have better customer service and loan products that suit one's business better. For example a local rural bank may have loans specifically for farming equipment and machinery. Depending on the type of loan, different smaller banks may specialize in or more types.

Small business loans are in plentiful supply within the United States. The variety and terms of U.S. business loans can be quite diverse and the application requirements depend on the type of loan in addition to other factors such as risk to the bank, rate of return etc. When researching a small business loan, the information contained in this article may be useful as reference and/or starting point for obtaining the right loan for a small business.

What Are Circular Loans

Circular loans are loans made by an entity owned by the entity receiving the loan. For example, Company A owns a subsidiary company B. Company B makes a loan to company A making the loan circular in the sense the assets all belong to the parent company. This article will discuss circular loans in terms of how they are made, why they are made and tax implications regarding the loans.

How a circular loan takes place 

Circular loans are similar to check kiting which is a form of check fraud and is punishable by law. The difference between kiting and circular loans however is that third parties are not involved and the intent is more likely to involve tax evasion than check fraud. Moreover, unless the funds do not exist, the circular loans do not constitute a form of kiting especially if the loaned funds are not used to pay expenses incurred from purchases or services received.

Circular loans are quite conceptually simple and the following example illustrates a circular loan. Mac is the sole owner and shareholder of three small businesses called 1, 2 and 3. Each of these businesses perform different functions. Business 1 is a dry cleaning company, business 2 is pawnshop and business 3 is an accounting practice. The owner of the company decides business 1 requires additional funding for an equipment purchase then "applies" for a loan from business 3. Business 3 then approves the loan and transfers the money to business 1.

Reasons why circular loans take place

The reason(s) the shareholder(s) and/or owner(s) of businesses and the businesses themselves may make circular loans vary. Some of these reasons may be legitimate in the sense that one company may have extra liquid assets that can be better used by the second company to create more profitability. In some cases however, the practice of circular lending may be fraudulent or illegal. For example, if the loans are used to disguise money laundering or to create company worth that does not exist, then the circular loans are probably fraudulent or illegal in some way. Below is a list of reasons circular loans may take place.

• Legitimate financing of business operations

• Owner investment of personal assets

• Money laundering

• Generate false asset value

• Tax evasion

Tax implication of circular loans 

Circular loans between some types of corporations are not deductible as an expense if certain conditions are met. For example, if an owner of a S Corporation/Small business makes a loan to a company that then makes a loan to another S Corporation and conditions with the loan terms protect the company and the capital provider from loss, then the loan is not tax deductible.

When the same shareholder as above owns multiple S Corporations between which loans occur, the loans are circular in terms of ownership. Moreover, as per a cost basis adjustment with the shareholders ownership of the company, such loans are not deductible as losses if unpaid because the value of loss is transferred rather than lost.

A similar situation arises when the recipient of the loan is also the owner of the company that makes the loan. In this case, the loan is also circular and may be questioned by tax authorities as being non-deductible due to the circularity of the loan.

Summary

Circular loans are a form of lending between separate businesses with the same ownership. The loans are circular in the sense that the net gain or loss is unchanged in terms of the ownership of the funds. Circular loans may be performed for a number reasons that may or may not be legitimate, thus the discovery of circular lending between businesses of shared ownership may be a red flag to banks, financial institutions or minority investors.

A company that lends a circular loan to the business owner or another company owned by the same party may not perform and thus be at greater risk of default on that loan. However, this is not directly related to the circumstances surrounding the loan itself. Circular loans performed for the purpose of reducing taxes is considered illegitimate in some cases as documented within the sources provided within this article.

Sources:

1. http://www.mobar.org/405bc858-3bcc-4faa-96ea-5607d75e5772.aspx http://www.allbusiness.com/personal-finance/individual-taxes-tax-deductions/950077-1.html http://www.bankrate.com/brm/news/chk/20021203b.asp
2. http://www.cpeforum.org/fall2006docs/Partnership%20-%20MSCPA.doc

How loans affect your credit score

Loans affect your credit score plain and simple. How loans affect your credit score is another matter entirely as this article will demonstrate. Credit scores are derived from credit reports that illustrate your credit profile in detail.

A credit score is the result of a quantitative analysis of one's credit variables, some or all of which are within a credit report, and is often computed by a company called Fair Isaac and called a FICO score (myfico.com) Consequently, understanding how a FICO score is computed can help you understand how loans affect your credit.

Types of loans and their influence on credit

There are so many types of loans that it would be unreasonable to apply the same credit influence to each kind. This is because different loans have different interest rates, risk, terms of service, guarantees, fees etc. Since these differences affect credibility in varying ways determining how these loans affect your credit requires a specific look at the different loans available, a few of which are listed as follows:

• Credit cards
• Vehicle Loans
• Mortgage loans
• Business loans
• Student loans
• Equity loans
• Secured loans

To determine how these loans specifically influence credit, a closer look at the credit score reveals their influence. As noted above, loans' affect on credit depends on a number of factors and are illustrated in the Understanding Your FICO score' document available through www.myfico.com. Some of these factors used by FICO are listed below with approximate weighted percentages of affect on credit score. The term credit' refers to money lent via various loan type(s) to the borrower who's credit score is in question.

• Credit/payment history (35% of credit score)
• Length of credit history (15% of credit score)
• Types of credit in use (10% of credit score)
• Amounts owed (30% of credit score)
• New credit (10% of credit score)

In the case of credit card loans, the amount of available credit used negatively affects credit score if it rises above 40%. Additionally, the total amount of debt from a loan and/or group of loans determines how indebted a borrower is i.e. amount owed. If loan payments have been missed, those missed payments will have a greater impact on credit score if they are closer in time to the present. Taking on a lot of debt or applying for several new loans at once can also negatively affect credit score because it statistically adds to a negative debt profile when this happens.

Since amount of debt owed only affects near 30% of total credit score, having a lot of debt does not automatically rule out having a good credit score. Rather, if this is the case, it does imply other factors such as paying bills on time and not applying for new loans become more important in keeping your credit score good. Further points to consider include having different types of loans and paying them off, and banking with the same institutions can improve the credit mix score and credit history aspect of the credit score. Too many credit cards can also impact your credit score negatively even if the credit isn't used. Some tips to keep your credit score up when borrowing through loans are listed below.

• Have 3 or less credit cards
• Use less than 40% of available credit
• Pay off a variety of different loans over time
• Bank at the same institution for a long time
• Avoid late payments
• Refrain from multiple new loans

Summary

Loans affect credit score in 1) the way they are paid off, 2) the amount of the loans and 3) the frequency and type of loans applied for and borrowed. Since credit history constitutes a considerable part of credit scoring, how one has borrowed in the past can also be influential even if the loans don't exist or have been paid off.

This article has illustrated how debt in the form of loans influences personal credit score and offers tips and information on how to potentially improve credit score from loans. Loans can be used to help build credit scores but only in certain circumstances and as defined by the credit score reporting agency involved.

Source: http://www.myfico.com