Monthly Archives: May 2016
Choosing a factoring service doesn’t have to be complicated. Here are three things to consider when selecting one for your business:
- What type of factoring does your business need?
- How much of your outstanding invoices do you need funded and when do you need it?
- How much are you willing to pay?
We will help you answer these questions below, but if you already know what you need and just want to see our recommendations for the best factoring service, visit our best picks page.
The first step to choosing the right factoring service for your business is figuring out which type of factoring you actually need. For instance, do you need a factoring service that covers all of your outstanding invoices upfront, or will a partial payment suffice? Do you prefer to keep receiving payments from customers, or will you hand collections over to the factoring company? And do you want to be held responsible to the factoring company if customers don’t pay? These are just some of the considerations we’ll cover below.
First, to help you better understand the many different types of factoring, here is an explanation of how factoring works, followed by a breakdown of the most common factoring services.
How factoring works
Factoring is an alternative method of financing that allows business owners to sell their invoices, or accounts receivable, to a third party, the “factor.” Factoring helps to fuel growth by providing the funds necessary to keep businesses going while waiting for customers to pay for outstanding invoices.
Here’s how factoring works in real life:
EcoNuts, an organic soap nut retailer that appeared on Season 4 of ABC’s “Shark Tank,” was unable to secure an investment deal, but still had a large purchase order from a major retailer on the line. The company opted to work with factoring company BlueVine to successfully fill the order. [See Related Story: BlueVine Review: Best Bad Credit Factoring Service]
“When [EcoNuts] came to us, they were limited by their working capital they had on hand to meet that demand,” said Edward Castaño, vice president of marketing at BlueVine. “They had so many outstanding invoices from TJX [parent company of TJMaxx, Marshalls, HomeGoods and the Sierra Trading Post], that it made it hard for them to fulfill orders.”
According to Castaño, EcoNuts didn’t have the cash to purchase the supplies and cover the salaries to fill the new orders, which put their growth trajectory at risk.
“[EcoNuts] used our invoice financing solution to unlock the cash trapped in their invoices to fulfill new orders and maintain their growth trajectory,” he said.
While small business owners acknowledge that there are some downsides to increasing wages for their entry-level workers, many of these business owners also find positives in doing so, new research finds.
Nearly 60 percent of small business owners said they favor raising the minimum wage, and the same percentage said they would likely vote for a state or national candidate who supports a minimum-wage increase, according to a study from Manta, a provider of products, services and educational resources for small businesses.
The results were released as both California and New York recently approved measures to gradually increase their minimum wages to $15 per hour.
The majority of small businesses surveyed are already paying their employees above what’s required. The research revealed that 40 percent of small business owners pay entry-level employees “far above” the required minimum wages in their areas of operation, while 38 percent pay “slightly above” the minimum wage. Just 14 percent are paying the state or local minimums, and only 9 percent are paying the federal minimum wage of $7.25 per hour.
“Many small business owners feel that paying above minimum wage is vital to staying competitive in their industry,” John Swanciger, CEO of Manta, told Business News Daily. “From a talent-acquisition and employee-retention standpoint, providing attractive compensation packages can help owners hire qualified individuals who will ultimately help grow their business.”
While nearly 30 percent of small business owners said a minimum-wage increase would have no impact on their operation, the requirement to pay employees more would require many businesses to make some changes.
Nearly 40 percent of those surveyed would have to charge more for their goods and services, 33 percent would need to reduce staffing levels, 27 percent would need to cut employee hours, 25 percent would be unable to expand their business or hire more employees, and 9 percent would need to cut their hours of operation.
Despite the negative effects, many small business owners still see the value of paying their employees more than the amount currently mandated.
“In tough markets especially, pay plays a large factor in recruitment and retention — so paying higher than the state or federal minimum is a huge plus, and one of the major pros of an increased minimum wage,” Swanciger said.
Additionally, raising the minimum wage will put more money into the hands of low-income individuals who will then have more expendable income for things like food, gas and housing, according to Swanciger.
“This boost in demand will stimulate the economy and create even more opportunity for small businesses,” he said.
Nonetheless, small business owners that are forced to raise wages will likely feel the pinch while they make the transition.
With tax season at an end, many small businesses assume that the worst of their IRS filing worries is over. However, a handful of business owners still have one more battle to fight: the dreaded tax audit.
As stressful and overwhelming as an audit may seem, there’s no need to panic. It does need to be taken seriously, but sometimes, audits deal with simple data or reporting errors that the IRS suspects may have occurred, said Frank Pohl, an attorney at Gunster law firm.
If you do receive an audit notice, here’s what to do to make the process go as smoothly as possible, and to minimize any negative impact on your business.
1. Review the audit letter carefully.
Open the letter promptly, and understand what information the IRS needs from you, Pohl said. If you don’t have a designated financial adviser, hire an accountant or tax attorney to help you go through the audit letter and identify the issues the IRS has flagged. Pohl also warned not to delay action or ignore the letter.
“The IRS will not go away, and not acting promptly may only make the auditor suspicious or antagonistic,” he said.
For security purposes, if you are being audited, you will receive a mailed letter, Pohl said. Scammers will often masquerade as the IRS by sending emails or leaving phone messages in an attempt to get your personal data, but the real IRS does not communicate with taxpayers in these ways, Pohl said.
2. Get your records organized.
Before you and/or your tax professional meet with an IRS auditor, take the time to dig up and organize all of your business records from the past tax year, said Kimberly Foss, a certified financial planner (CFP); founder and president of Empyrion Wealth Management; and author of “Wealthy by Design” (Greenleaf Book Group Press, 2013). This includes receipts and invoices for income and expenses, bank statements and canceled checks, accounting books and ledgers, hard copies of tax-prep data, and leases or titles for business property, she said. If the IRS has requested specific documents to review, be sure you have those readily accessible as well.
3. Answer the auditor’s questions (and that’s it).
When you sit down with the auditor, you’ll be asked numerous questions about the information reported on your tax return. Our expert sources agreed that you should not volunteer any information you are not required to give.
“Just respond with the information [that is] requested,” Pohl told Business News Daily. “Providing unneeded or unasked-for information may lead to more questions … and additional issues.”
“Be straightforward in responding to questions, but don’t manufacture excuses,” Foss added.
Unsure of what you should and shouldn’t say? Sandy Gohlke, a CPA, chartered global management accountant and principal at Rehmann financial services company, advised giving the IRS a signed power-of-attorney agreement that will allow the IRS to deal directly with your tax professional.
“That takes you out of the loop and puts them in,” she said.
Pohl agreed, and said that even if your tax professional doesn’t have power of attorney, you should still have him or her present when you meet with an IRS auditor. He also advised business owners not to get defensive or hostile during the interview.
If you’re looking for cash to fund business growth, odds are you’ll do it with a bank loan or a line of credit. But, especially for smaller businesses, merchant cash advances are another popular source of funds.
A 2015 Federal Reserve Bank of New York study found that, although loans and lines of credit are the most popular financing method among small businesses (57 and 52 percent, respectively), 7 percent had used merchant cash advances in the previous year. Smaller businesses were more likely to do this: 10 percent of microbusinesses (revenues below $100,000) took out merchant cash advances last year.
Either a loan or a cash advance may be a good choice, depending on how proceeds of the loan will be used.
“Loan purpose should drive the whole conversation,” said Ty Kiisel, head of financial education for OnDeck, an online provider of business loans. “That is going to tell you how much money you need and how much you can afford to spend for it.”
The mechanics of merchant cash advances
Although both financing methods involve receiving and repaying a sum of money, merchant cash advances are not the same as loans. Rather, the business receives an advance against its future credit card sales, and the provider draws money from the business’s future credit card transactions as repayment. Payments are made daily or sometimes weekly.
The repayment amount is based on a percentage of daily credit card sales called the holdback, which may range from 5 percent to 20 percent. For example, if a business does $10,000 in credit card sales, and the holdback is 10 percent, the repayment amount would be $1,000. The holdback percentage doesn’t change. However, the payment amount may vary depending on the volume of credit card transactions.
The cost of an advance, called the factor rate, is also a preset figure. Also called the buy rate, it is usually expressed as a figure such as 1.2 or 1.4. An advance with a factor rate of 1.3 means the business will repay $13,000 for every $10,000 advanced for a period of a year.
The way merchant cash advances are priced can make it difficult to compare their cost with business loans. An advance charges all interest on the full amount up front, while a loan charges interest on a smaller amount each month as the principal is paid off. So a $30,000 charge for a $10,000 advance is not equal to a 30 percent annual percentage rate (APR) business loan. Instead it is closer to a 50 percent APR. With additional fees, the effective rate can go much higher.
Jared Hecht, co-founder and CEO of New York City-based Fundera, an online platform for matching businesses with loans and advances, says users of advances often don’t realize the true cost.
“We’ve seen customers who have taken out merchant cash advances and are paying an APR north of 150 percent and not even knowing it,” Hecht said.
Advances are short-term financing, and so are best suited for short-term for needs such as acquiring inventory. Most are designed to be repaid in six to 24 months. And unlike most loans, paying off a merchant cash advance early will not produce any savings. The factor rate is the same whether it takes the full intended term to pay back the advance or a shorter or longer time.
Because an advance does not require set monthly payments, a business will pay more when sales are good and less when sales are down. This can help to avoid cash crunches that might be more frequent with set monthly payments.