The Accounts Receivable Funding Scenario

For a Business with Account Debtors

Use the Invoice Profitability Calculator with different scenarios and discover which approach is best for the business.

Keep More of Your Money.

Consider a business who is experiencing a temporary cash flow problem or a business who can not grow fast enough in order to meet their objectives. In either case Accounts Receivable (A/R) Financing can enhance business growth and alleviate a cash flow dilemma. For example, suppose a business has to pay their vendors (totaling 50% of goods sold) at least 15 days prior to delivering the manufactured products to the customer. The business then invoices the customer (terms Net 30 Days) and the customer takes between 45 to 75 days to pay for the goods sold. This restrains the cash flow of the business and ties up the working capital for a total of 60 to 90 days. This triggers two questions. If I use A/R Financing, "How much does it cost?" and "Can I afford it?"

To answer those questions let us look at a A/R Financing solution for a typical business transaction. Using the example transaction above, the largest working capital requirement for the business is represented by the "Hard Costs" (51%). Normally, the Cost of Goods Sold (COGS) is composed of both "Hard Costs" and "Soft Costs." The "Soft Costs" associated with an ordinary transaction ranges between 6% to 15% of the actual Invoice amount. For analytical purposes the "Soft Costs" for this transaction are assumed to be 9% of the Invoice amount. Therefore, the business has a 100% Accounts Receivable whose investment into working capital totals 60% and is outstanding for 60 to 90 days.

The A/R Finance Company would typically Advance to the business 70% of the face value of the Invoice and would purchase the Invoice at a discount. The balance, called a Rebate, would be paid to the business after the customer paid the Invoice. The amount of the Rebate is based on the length of time the A/R is outstanding (typical discount rates could be 3% for a 15 Day A/R plus 2% every 15 days thereafter).

The profitability of any business is based upon the return on investment (ROI). In this case the Investment is 60% and the Return is 100%. The Investment is recovered entirely with the Advance provided by the A/R Finance Company. With A/R Financing the Investment can be turned over every 15 Days (24 times a year) effectively reducing the average daily working capital requirement; whereas, the Investment without A/R Financing can be turned over much less depending upon the length of time the A/R remains unpaid.

The stratagem for business owners is to maximize their ROI in the investment of working capital. The Internal Rate of Return (IRR) is used quantify the value of the ROI. The IRR represents the interest rate where the Present Worth of the Investment is equal to the Present Worth of the Return. In this business transaction the IRR using A/R Financing is 700%, 620%, 562%, and 529% for a 30, 45, 60, and 75 day A/R (assuming the Advance is paid within 48 hours and the Rebate is paid within 7 days). Compare this to the IRR without using A/R Financing of 417%, 312%, 249%, and 208% for a 30, 45, 60, and 75 day A/R.

Compare a 45 Day A/R. Business Owners have a choice of investing their money in a strategy that yields 620% IRR or the current business model IRR that yields only 312% IRR. The primary question that comes to mind is "I now realize the ROI using A/R Financing in a better investment for me, but won't my next year's sales revenue be reduced by the discount amount going to the A/R Financing Company?" The answer is NO provided the business will grow more than the discount rate.

Here is why it works for most companies. Numerous companies can not grow any faster without financial help. A/R Financing does relieve the cash flow stress that many businesses face every day.

To examine the way it works for most businesses assume a discount rate of 7% and the company sells 50% of their A/Rs. This means the "Break Even" growth rate would be 3.5%, just about the current Cost of Living Index. If a company is not growing faster than the Cost of Living Index, it will probably fold. Most companies, however, do grow using current cash flow limiting scenarios (typically 8% to 12% per year). Now a business can grow between 25% to 400% using A/R Financing cash flow enhancement scenarios. This represents a gain in revenues and bottom line profits without any additional investment required by the business or the business owner. Consequently, if the business plans to grow more than their current annual growth rate plus the "Break Even" growth rate, then A/R Financing increases profitability.

Accounts Receivable Financing may be the right financial vehicle that eases cash flow stresses and generates higher profits for your business. Most businesses can qualify for this type of financing.

We don't Make your Money. We Make you Keep More of It.

The Contract and Purchase Order Funding Scenario

For a Business with Account Debtors

Use the Invoice Profitability Calculator with different scenarios and discover which approach is best for the business.

Keep More of Your Money.

Consider a business who is experiencing a temporary cash flow problem or a business who can not grow fast enough in order to meet their objectives. In either case Purchase Order (PO) Financing would enhance business growth and alleviate a cash flow dilemma. For example, suppose a business has to pay their vendors (totaling 50% of goods sold) at least 15 days prior to delivering the manufactured products to the customer. The business then invoices the customer (terms Net 30 Days) and the customer takes between 45 to 75 days to pay for the goods sold. This straps the cash flow of the business and ties up the working capital for a total of 60 to 90 days. This triggers two questions. If I use PO Financing, "How much does it cost?" and "Can I afford it?"

To answer those questions let us look at a PO Financing solution for a typical business transaction. Using the example transaction above, the largest working capital requirement for the business is represented by the "Hard Costs" (51%). Normally, the Cost of Goods Sold (COGS) is composed of both "Hard Costs" and "Soft Costs." The "Soft Costs" associated with an ordinary transaction ranges between 6% to 15% of the actual Invoice amount. For analytical purposes the "Soft Costs" for this transaction are assumed to be 9% of the Invoice amount. Therefore, the business has a 100% Accounts Receivable whose investment into working capital totals 60% and is outstanding for 60 to 90 days.

The PO Finance Company would typically Fund 100% of the "Hard Costs" and would purchase the Invoice at a discount. The Rebate would be paid to the business after the customer paid the Invoice. The amount of the Rebate is based on the length of time prior to Invoicing the customer and the length of time the A/R is outstanding (typical PO Finance Company discount rates could be 3% for each 15 Day period).

The profitability of any business is based upon the return on investment (ROI). The Working Capital Investment is reduced significantly (COGS is reduced from 60% to 9%). The major portion ,51%, is funded entirely by the PO Finance Company. Therefore, with PO Financing Investment is now only 9% and the Return is 100%.

The stratagem for business owners is to maximize their ROI in the investment of working capital. The Internal Rate of Return (IRR) is used quantify the value of the ROI. The IRR represents the interest rate where the Present Worth of the Investment is equal to the Present Worth of the Return. In this business transaction the IRR using PO Financing is 1,138%, 860%, 685%, and 564% for a 30, 45, 60, and 75 day A/R (assuming the Rebate is paid within 7 days). Compare this to the IRR without using PO Financing of 417%, 312%, 249%, and 208% for a 30, 45, 60, and 75 day A/R.

Compare a 45 Day A/R. Business Owners have a choice of investing their money in a strategy that yields 860% IRR or the current business model IRR that yields only 312% IRR. The primary question that comes to mind is "I now realize that the ROI using PO Financing in a better investment for me, but won't my next year's sales revenue be reduced by the discount amount going to the PO Financing Company?" The answer is NO provided the business will grow more than the discount rate.

Here is why it works for most companies that qualify for this type of financing. Numerous companies can not grow any faster without financial help. PO Financing does relieve the cash flow stress that many businesses face every day.

To examine the way it works for most businesses assume a "Hard Cost" discount rate of 12% and the company sells 50% of their A/Rs. This means the "Break Even" growth rate would be 3.1%, just below the current Cost of Living Index. If a company can not grow faster than the Cost of Living Index, it will probably fold. Most companies grow using current cash flow limiting scenarios (typically 8% to 12% per year). Now a business can grow between 25% to 400% using PO Financing cash flow enhancement scenarios. This represents a gain in revenues and bottom line profits without any additional investment required by the business or the business owner. Consequently, if the business plans to grow more than their current annual growth rate plus the "Break Even" growth rate, then PO Financing increases profitability.

Purchase Order Financing may be the right financial vehicle that eases cash flow stresses and generates higher profits for your business. Businesses with few "Hard Cost" vendors can qualify for this type of financing.

We don't Make your Money. We Make you Keep More of It.