It’s a problem many businesses face: Lack of cash flow makes it difficult to progress to the next level. However, accounts receivable factoring can provide a viable solution for almost any type of company.
This billion-dollar industry is a popular alternative for businesses wanting to speed up their cash flow. Accounts receivable factoring allows you to have quicker access to capital, instead of waiting 30 to 60 days to receive customers’ payments. Selling invoices lets you generate instant cash advances that you can put to good use for your business. You can spend the funds on anything you choose, including payroll, taxes, equipment and inventory.
With accounts receivable factoring, you essentially liquidate your outstanding invoices to a factoring company in return for immediate working capital. The company purchases the invoices at a figure less than face value, and then collects the full amount later when the receivable is due. In essence, you avoid the time involved with handling your own collections–not to mention the hassle and expense of dealing with bad debts.
Accounts receivable factoring is a feasible alternative to conventional financing like loans, credit lines and credit cards. And it’s ideal for smaller and/or less well established companies that may not be able to qualify for loans. Unlike with traditional financing, approval for accounts receivable factoring isn’t contingent upon the creditworthiness of your company. Instead, it depends on your clients’ financial stability and payment history.
Here are some other reasons why accounts receivable factoring is a viable source of funding:
– Accessibility – The unique approval process makes qualifying possible for companies that are small, young and even those with a history of liens and bankruptcy.
– Control – You control exactly how much accounts receivable to factor, when, and for which customers.
– Predictability – You can determine when you will receive customer’s payments based on the terms with your factoring company. This can result in a “smoother” cash flow cycle.
– Debt Avoidance – No debt is incurred, so there are no monthly payments to make.
– Flexibility – The added cash flow can help you offer better terms to large customers, as well as offer instant credit guarantees for new customers–which can increase your sales.
– Savings – You can pay suppliers quicker and enjoy discounts for early payments.
Who Should Capitalize on Accounts Receivable Factoring?
With all the benefits involved, the appeal for accounts receivable factoring is quite obvious. But how can you be certain invoice factoring can provide the right fit for your company? Generally, if you pay for labor or materials before receiving payment from your customers, your business can benefit from factoring.
More specifically, eligibility for accounts receivable factoring requires that there are no existing primary liens on your invoices. Also, your customers must be financially sound and have a positive history of paying invoices. Otherwise, accounts receivables factoring may be the answer for you if:
– Your business cash flow is stressed by lengthy billing cycles.
– You can’t obtain bank loan approval due to a lack of longevity, profitability, assets and personal guarantees.
– You could increase sales by enhancing your terms to new and larger customers.
The Accounts Receivable Factoring Process
The accounts receivable factoring process is relatively straightforward. First, you complete an application and provide the factoring company all the necessary information about your business and accounts receivables. Keep in mind that each factoring company prefers different types of clients. Some want to work with companies with annual revenues of at least a million dollars; others like to deal with businesses making as little as a $5,000 per month. Additionally, some factoring companies specialize by region or industry.
Next, the factoring company does its due diligence and prepares all the necessary legal paperwork. This step can take anywhere from five to 10 business days. After you have established a working relationship with the factoring company, the hardest part is done.
Thereafter, you simply prepare customer invoices and then send them to the company to receive an immediate cash payment. The factoring company will bill the customer and follow up to ensure receipt of payment, handling all the accounting, invoicing and other payment processing responsibilities.
If everything checks out with your invoices, you can receive a cash advance anywhere from 70 to 90 percent of the value of the purchased invoices. Once your customers have submitted their payments directly to the factoring company, you’ll be sent the “unadvanced” amount of the invoice, excluding a financing charge. (Some factors maintain customer accounts similar to a bank’s revolving credit account. In this case, your available balance would vary with the number of accounts receivable outstanding, with interest being charged on a daily average balance.)
Transaction fees for accounts receivable factoring vary from company to company. But typically, accounts factoring fees range from three to five percent of the invoice value. And the fee may actually be as low as 1 percent, depending on the quality of your accounts and level of risk involved. It’s important to note that the fees assessed by factoring companies is generally more than what you would pay for a short-term commercial loan. Therefore, it’s most beneficial to use accounts receivable factoring to create quick cash, not as a source of long-term financing.