When you factor in receivables your business needs to provide the lender with all the details required to establish your credit line.
What has caused accounts receivable to factoring to become such a crucial source of financing for companies in the telecoms industry? In addition, why do so many integrators, manufacturers of original equipment distributors, or VARS (value-added resellers) think of accounts receivables factoring as a vital aspect of their business? To address these issues consider the challenges associated with managing a company’s operations in either the wireless or satellite communications markets.
Imagine the fact that both areas are observed for their extremely long receivable collections times and the difficulty to control cash flow when taking care of a receivable that could take between 120 and 150 days to pay. Consider the difficulties it is for businesses to function in these markets, one in which their ability to meet the time of delivery can be measured by the capacity to keep a positive balance of cash, which permits them to purchase the essential raw materials required for manufacturing. Also, consider the value chain involved in the process of constructing the terrestrial earth station and integrating a massive remote-location project. In the end, factoring accounts receivable is not just essential for the operations of a telecom company however, it’s also crucial to the success of the company.
The Difficulty of Financing a Telecom Enterprise
Many would believe that telecom companies have several financing options such as whether Greenday is fast & online or that financing a business in the telecom industry is fairly simple. This isn’t the situation. It’s true that the majority of traditional financial institutions and banks aren’t willing to collaborate with the telecom sector. At one point institutions like banks or credit unions seemed more inclined to provide telecom companies with capital. However, the times have changed, and banks are now hesitant to take on the risk of financing companies with long collection times for receivables. These banks as well as conventional finance sources tend to interpret the lengthy receivable collection time as a sign of imminent disaster, one in which losses are increased and that sees multiple businesses in the value chain may end with bankruptcy.
Even for companies who are able to avail of a credit line from banks the security of their credit line is less than that of a guarantee. First, businesses must supply banks with the three financial statements. This means providing the bank with the financial statements of the business, including its income statement, cash flow, and balance statements. In certain instances, banks require audited financial statements because the risk of making a mistake in a financial report is very significant in the present market. In addition, telecom firms often must provide a track record of performance, a situation in which the bank is able to assess the company’s performance over three or five years. In addition, banks today conduct an extensive examination of a company’s credit rating and past history which often requires an independent audit of the financials of the company through the company’s Dun and Bradstreet’s (D&B) report.
The truth is that financing a telecom business is a major undertaking for banks, one that does not take lightly, and one that they don’t take on without first looking over all of the necessary requirements. The bank’s view is that the relationship is long-term that requires the telecom business must satisfy certain stringent requirements. However, very few businesses can meet the requirements. A small percentage of telecom firms have the profits and good cash flow to qualify for the financing they require from a bank. The most important thing is that only a handful of companies are in a position to solely rely on banks for financing. The problem is ultimately due to the challenge of managing an enterprise in the telecom industry, a sector that has long collection times for receivables are the norm and all businesses are guaranteed to experience cash flow issues. How can telecom companies secure financing when one of its prerequisites is a sound financial statement of cash flows? In the final analysis, the balance sheet is insufficient due to the market and not due to the way the telecom company is operating.
Understanding Accounts Receivable Factoring
Factoring accounts receivable factoring is considered to be an asset-based financing solution in which telecom firms can make use of their receivables to create a credit connection with the finance company. Receivables factoring is one of the many asset-based financing options that businesses within the telecom industry may utilize. Alongside receivables financing, there’s also purchase orders finance, financing of inventory, and real estate financing.
When it comes to the financing of purchase orders, a company in the telecom industry can utilize its long-term and short-term contracts as well as current purchase orders and backlogs confirmed as credit in order to obtain working capital. When it comes to financing for inventory items, a telecom business is able to utilize assets in its inventory to create a credit line. Additionally, any company which owns its facility or warehouse could use both to obtain credit. However, using the inventory financing method is not a safe option which is why the cost is significantly more expensive than other asset-based financing options. Furthermore that not every business owns its warehouse or its building. But, all telecom businesses are able to use accounts receivables factoring. Receivables factoring, in the end, is ideal for all telecom firms. How does it work?
Simplifying Accounts Receivable Factoring for Telecom Companies
With accounts receivable financing, your company won’t need to wait for 90-120 days to pay the receivable. Instead, you can transfer that receivable to a financing firm that advances your company by up to eighty percent receivable’s worth. When you purchase the receivable, the financing company is charged with the obligation of collecting the invoice of your customer. After your customer has paid in full the financing company will credit your account with the difference between the advance of 80 percent and the remaining 20 percent of the outstanding receivable. In addition, there is an administration charge and an effective rate that is charged for the services of the financing company. Administration fees are added directly to the total amount of the receivable, whereas an effective rate applies to the 90 percent initial advance.
In the case of credit line factoring your business must supply the financing company with all the information necessary for the establishment of a credit line. This includes providing the company financing the loan with information about your client’s name as a business and location, as well as their telephone numbers as well as their business lines, and any other information regarding the number of sales that are generated by the particular customer.
Comparison of Asset-Based Financing and Bank Financing
What exactly is an asset-based financing solution like receivables-factoring distinguishing itself from banking financing? There are many differentiators. For one, financing through banks requires providing the three financial statements, as well as running a series of checking and balances. When it comes to receivables factoring, your business does not require financial statements. In addition, with bank financing, the responsibility is on the company to satisfy an extremely stringent set of requirements that are mostly dependent on having a high credit rating and having a good performance over a certain duration. With receivables, however, taking into account your business’s credit rating does not play a role in the choice to increase your company’s capital. It is instead a matter of deciding on the creditor’s credit rating. In the end, financing with banks means taking out a loan that will appear in your financial statements. However, receivables factoring is like a loan however, it won’t be listed in your financial statements.