In a competitive economy it isn’t always easy or even common to find a company that is truly dependent on the type of raw materials and commodities that are available. In today’s rapidly changing economic climate banks and other lending institutions are continually looking for alternative means of securing their cash. Many of the large corporations still receive their capital from the traditional banking financiers. They are able to obtain funds by going to the local or private lending institutions. However if a company has a large amount of receivables and bad debts or whether they are a recently acquired or recently started business then they may want to consider other alternative sources of working capital.

One of the lesser understood working capital strategies is how it can affect the interest rates that are charged or could be charged by some private finance company. The constant changes in rates make it difficult for some companies to remain competitive. Some small or medium sized businesses may look to take advantage of what is known as the factoring provision. There is a very simple concept of a factoring arrangement. The factoring company purchases receivables in the name of the client company. As long as the client payments are not delayed by a single period the factoring company will assume the risk of the debtor being unable to pay and release the net balance of their seasoned owed monies to the client. The lower the average age of accounts that become receivables the less risk that the factoring company assumes. The main risk is for simple and human errors.

A little know fact is that one of the major factors in the change or preservation of a certain bank’s bottom line is to ensure consistently that there is sufficient funding for the bank to meet all of its liabilities, including non-payments of outstanding accounts by customers. Thus if a bank were able to continue to provide a positive net profit at a bank set up like a traditional bank but was in fact faced with a concerted and concerted effort by its customers to avoid paying for bank financing then the bank could actually become solvent. This is one of the reasons that banks currently don’t like to do business with start-ups or companies with a dire credit rating.

In order for a bank to be in a condition of economic viability it needs to have sufficient reserves of capital in its operating account so that if there were to be a setback in the revenues of their customers the banks could incidentalally have the capital necessary to passengerfile for any deficiencies. These uses for reserves are called operating rows. responded to by lending institutions, from a capital standpoint, is one of the types of risks that traditional lenders – known as commercial banks – look for in their customers.

If the overall banking system wereJohnivity then a focus on that section of the banking industry would solely be dealing with commercial banks. This would tend to make it easier to raise capital. Insurance companies, asset and estate management firms, asset portfolio managers, and others tend to profit from the commercial and industrial financing marketplace.

If you’re a new commercial bank you’re facing the challenge of a same old dilemma. The traditional commercial bank is trying to attract new business and grow profits by offering effective ways to manage investments. If you’re in a particularly risky part of the market then it’s especially difficult toachievea success. However, if you’re in a good situation to serve the array of business types who are looking for an alternative to traditional bank financing then you’ve stumbled upon a gold mine.

Unlike traditional bank financing, factoring is an extremely cost efficient and reliable alternative to bank lending. The main disadvantages of factoring are as follows:

• Compliance issues – factoring is unlike banks and their banking customers, who are the subject of federal Uniform Credit Methods Act (UCA) regulations. With factoring, you’re at all times in control. This means that you can not be held to the strictest of financial lending guidelines.

• Cash flow problems – because factoring occurs solely upon the information provided by your customer at the time of administration, there is no way a lender can force you to pull funding once you have fulfilled what the lender has agreed to do.

• Cost – fees and commissions associated with factoring can typically cost between 2 ½% and 3 ½%. Even at that high a commission percentage, it is more cost effective than traditional bank financing. The break-even point for a factoring arrangement is typically about 6 months.

• Repayment – underwriting, funding, and remittance of invoice factoring all have specific time minimums, which dictate the priority of which payments are to be repaid first. Meaning of repayment is strictly determined by the cash flow from the customer’s accounts receivable, less the non-Cash Flow Guaranty from factors that fund assets sold.

• Third party factoring involves sizable additional deductibles, which significantly reduce the cost of factoring.