Halfway through 2024 – time flies these days. Before starting the July newsletter there are a couple of items DEROTTO wants to mention:
1. We love dogs at DEROTTO and we donate $25 for every funded financing transaction. For the first 6 months of 2024 DEROTTO donated $2,425 to our favourite rescue dog organization – Paws It Forward.
2. For the first 6 months of 2024 DEROTTO gave away $18,050 in gas. To learn more about DEROTTO’s gas card program click on Earn Gas.
Thank you to everyone for the trust and support.
There are a couple of topics DEROTTO wants to talk about this month:
1. What is factoring and how can it help your business?
2. Don’t use the wrong financing tool for equipment financing - Not all financing is equal!
What is Factoring and how can it help your business?
An essential part of running a business is managing cash flow. Accounts receivable factoring enables companies to sell all or part of their account receivables to a 3rd party in exchange for cash advances. Factoring is not debt financing. The 3rd party buys all or part of a business’s accounts receivable and the business receives money upfront. In short, factoring allows a business to improve cash flow in 2 ways:
Transfer the credit risk of its accounts receivable to a 3rd party. Leverage its accounts receivable to accelerate its working capital through the sale of its accounts receivable to a 3rd party.
Factoring might be a fit for your business. Businesses are constantly telling DEROTTO how difficult it is to collect money from its clients. Many businesses have 60 days, 90 days, 120 days, or longer overdue accounts receivable. The main reason companies consider factoring is to get paid on their invoices quickly, rather than waiting to collect. How much company factors will depend on its unique business needs. Some companies factor all of its invoices, while others factor in only invoices for customers that traditionally take longer to pay. With factoring, companies get the increased cash flow they need to:
1. Pay payroll
2. Handle client orders more efficiently and take on more business:
Factoring can give a business a competitive advantage. With factoring, a business can offer its clients credit terms rather than cash up front without the hit to the business cash flow. Even though the client pays with credit, factoring allows a business to have cash flow immediately.
3. Pay off debts, such as CRA
DEROTTO has expanded its lending network to include companies that offer factoring. If your business needs cash fast, then factoring might make sense.
No equipment security.
Don’t use the wrong financing tool for equipment financing - Not all financing is equal!
It’s important to understand how equipment term loans and lines of credit work. DEROTTO constantly comes across businesses that have a misunderstanding of how to use a line of credit and subsequently, this puts a business in a bind.
Equipment Term Loan
With an equipment term loan, a business borrows money for a piece of equipment for a specific period of time, with a fixed interest rate and agreed-upon payment schedule. Debt consolidation is another example of a term loan.
Business Line of Credit
A business line of credit generally refers to a revolving credit line that allows a business to draw funds as needed, up to a predetermined credit limit. A business pays a line of credit by making regular payments against the outstanding balance. Interest is only charged on the amount borrowed and the interest rate is typically a floating rate. The main function of a line of credit is to cover ongoing operational costs or manage cash flow fluctuations.
Where a business gets into trouble is when a line of credit is used for debt consolidation or to buy significant purchases, such as a vehicle, excavator, large software upgrades, CNC machine, etc. Since a line of credit should be used for day-to-day operations, having a large portion of a line of credit tied up with a significant purchase, can put a business in a cash flow crunch because it doesn’t have access to money.
Businesses that use term loans for long-term investments while relying on lines of credit for short-term working capital need to ensure a business will maximize its ability to manage cash flow.
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