The banking industry recently went digital with the advent of Check 21. The industry, in an effort to make banking faster and more efficient, embraced technology to cut the time it takes to clear checks. Like any change, Check 21 doesn't come without some headaches. Speeding up check clearing means quick turnaround for deposits, but for businesses that rely on a float period, Check 21 also means overdrafts and insufficient funds. For businesses that run with tight cash flow, factoring may offer a perfect response to this digital enhancement of our nation's banking system.

The Check Clearing for the 21^st Century Act, termed Check 21, took effect as federal law in October, and marked a new era in banking and technology.  Before Check 21, banks had to ship paper checks to clearinghouses where the checks were redistributed to the originating banks to be processed and cleared.  This process typically took a few days leaving a float period between the time a check was written and the time money was withdrawn from an account.  Under the new law, banks can create a digital image of a check that can be sent electronically and instantaneously to the originating bank for clearing.

The rationale behind Check 21 took hold after 9/11 when air, land, and sea transportation came to a halt leaving a substantial amount of the economy tied up in the form of unprocessed checks that sat in loading docks around the country.  While Check 21 isn’t mandatory for banks to adopt, there is no doubt it will soon become industry standard because of the assuredness of the electronic system and the reduction in processing and transportation costs.

Whereas banks see Check 21 as a drastic improvement to a slow and outdated process, many businesses see otherwise.  Check 21 means businesses can no longer rely on a 2-3 day float period when writing checks to suppliers or employees. 

Since the establishment of Check 21, Hamilton has received quite a few inquires on how factoring can ease the elimination of float days.  One example is of a business that used float days to collect on accounts receivable in order to cover payroll.  The business handed out paychecks on Friday, knowing that cash to cover the checks wouldn’t need to be in their account until Monday or even later.  This meant it could use payments received over the weekend to cover payroll.  With Check 21 now in place at many banks in his area, the business owner sought a new way to manage his cash flow.

Hamilton can help this business and ones like it by allowing them to gain better control of their cash flow.  By factoring particular invoices from select accounts, a business can eliminate the need for float and get some breathing room with respect to cash.  The business in this scenario can factor invoices of their choosing and get cash when the timing is right rather than relying on payments.  Consequently, the business can cover payroll and not worry about overdraft charges.

In the world of finance, there is a variety of products available to solve the perennial problems growing businesses face. Unfortunately, certain barriers limit many businesses when it comes to adopting new forms of finance. If not overcome, these barriers could potentially hinder a business's ability to maximize value and potential.

1.      Lack of Information

Many business owners don’t know the various options available when it comes to financing their business. Most businesses are familiar with bank loans and credit lines, but when it comes to alternative forms of financing, such as trade credit, leasing and factoring, most businesses are still in the dark.

The internet is a great starting place for businesses to learn the various finance options available, so too are firsthand sources such as accountants and consultants. For more information on factoring, Hamilton's Pocket Guide to Factoring is a useful resource.

2.      Perception That Alternative Forms of Finance Are Too Costly

Many equate taking on new forms of financing with taking on additional burdens, such as increased debt, loss of equity, more assets pledged as collateral and high interest rates or fees.

The financial market is more competitive now than it has ever been before.  As such, pricing is lower and restrictions are fewer.  In fact, a new form of finance, such as factoring, could actually be cheaper than the business’s current financial solution.

4.      Wrong Fit

Many business owners are under the assumption that an off-the-shelf financing product can’t solve their problem because their situation is either too particular or convoluted to be fixed with a conventional product.

This assumption couldn’t be more wrong.  With the number of financial products and variations thereof available to businesses, there is a solution to almost every problem. Most financial providers are in-tune to the fact that no two businesses have the same financial needs, and respond by offering multiple products to suit a wide variety of needs, or like Hamilton, offer financial programs tailored to the individual needs of a client.

Who invoices my customer if I factor my invoices?
You do. With Hamilton, the invoicing function remains with you, our client. You maintain control of your customer accounts and continue to invoice as usual with no interruption.

Hamilton only requires a lien on Accounts Receivable and General Intangibles. What are General Intangibles?
Placing a lien on accounts receivables wouldn't do much good unless we also had access to the recordkeeping that went along with those receivables, like general ledgers, accounting documents and software. General intangibles includes these documents, as well as other types of receivables not already defined by "accounts receivable."

A few months ago, Hamilton published an enormously comprehensive and handily sized Pocket Guide to Factoring. The Guide provides information on the various terms and practices common among factoring programs. Its convenient layout allows you to, with the flip of a thumb, sort through the various options available with common sense explanations and definitions. If you would like to receive a copy of this informative Guide, it's FREE. Click below.