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Try invoice discounting as alternative financing.

Here's a sad, though common, scenario for many of today's small businesses: Receivables are stretched to the limit -- 90 days isn't unusual -- and cash flows have slowed to a trickle. Meanwhile, nervous suppliers want to be paid, and so do staff. Other overheads have to be met as well. It all means money!

And if your business happens to be cash hungry, where is this money to come from -- especially now that traditional sources of financing have dried up. You'll find that bankers are notoriously loan-shy these days in their dealings with small businesses. So what's to be done?

Fortunately a very viable alternative financing method is available. And that is what's known as invoice discounting.

The beauty of invoice discounting (a close relative of factoring) is that it speeds up payment of your accounts receivable, thus helping your cash flow. The 90-day wait is out -- you get your money immediately.

The other nice thing is that it's fairly easy to arrange. And here's how.

The same day you make a sale and prepare your invoice for that sale, you take the invoice to a discounter -- and collect your money immediately.

In essence, the discounter is actually buying the invoice. He pays the full amount up front, less his commission, or discount, which usually runs to 1.5 percent for every 15 days.

That means if you have $10,000 worth of invoices, with payment due in 60 days, the total commission will be $600. So you come away with $9,400 in your pocket.

At first glance this commission may seem a little steep. It's certainly more than a bank loan would cost. But what bank loan? The comparison is purely academic.

The advantage is that you have the instantaneous use of the funds, leaving you in the position to benefit from prompt payment discounts or other incentives your suppliers may offer.

Not only that, the funds allow you to step up your business activities (such as manufacturing) and increase sales, thus generating additional income. So the commission could well turn out to be very reasonable indeed.

At present invoice discounters are located chiefly in the larger urban centres -- and are not all that plentiful. (There are perhaps only five in Toronto, for example).

If you want to find one, ask your chartered accountant or your banker. If anyone knows, they will.

Moneycare is general financial advice by Canada's chartered accountants. Keith Doxsee operates his own chartered accountancy practice.


(NC) -- Despite our conservative reputation, Canada is one of the most entrepreneurial nations in the western world. For example:

* Canada has more entrepreneurs per capita than the United States and Europe.

* 15% of Canadians are self-employed, earning more than half their income from their own businesses.

* 12% of Americans are self-employed.

* Experts agree there are fewer entrepreneurs per capita in Europe than in Canada and the United States.
COPYRIGHT 1992 Canadian Institute of Management
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Doxsee, Keith
Publication:Canadian Manager
Date:Dec 22, 1992
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