What is Accounts Receivable Factoring
Accounts receivable factoring
Receivable factoring is the way to maximize your business’s cash flow, and is a valuable asset in and of itself. Rather than give up any ownership rights in your company or get into long term loans, you can sell off your invoices for almost instantaneous money.
Receivable factoring is actually selling an asset, your invoice! Selling your invoices to a third party (the Factor) has some great benefits. The Factor collects the money, so you don’t have to do that. Also, you don’t have to wait for your customers to pay you after you make a sale.
Let’s take a look at a few more specific advantages:
- Immediate cash flow without waiting for your money or incurring additional debt during that period. You can receive very quick payment after invoicing.
- Your business does not need to have a good credit rating- you are not borrowing money, but rather selling your accounts receivable to someone else.
- No responsibility for collections of slow-pay customers and advanced collection techniques for those who do not pay at all.
- The Factor will very efficiently handle your invoices and all data entry that results.
- Ability to take advantage of discounts from your vendors due to your increased cash flow.
- Expanded growth is possible due to increased production and sales.
Small business owners know first hand how hard it is to maintain adequate capital to run and grow your business. During periods when regular financing, like loans and credit, are in limited supply, some business owners turn to accounts receivable factoring.
The Factoring company looks at a number of things before making an offer on your receivables, or on a single invoice. The manner in which the customer has historically paid this account is important, as is the age of the invoice, with newer ones being more valuable.
There are possible drawbacks to using factoring as a method to gain cash flow for your business; including the cost. Rates will vary among the different factoring companies so it is imperative to shop around for the best deal and most flexible contract. Typically, companies pay up to 90% of the outstanding amount of the invoices. Paying out 10% may not seem high at first, but can really add up over the course of a year.
Factoring is an old, paper-based model that hasn’t changed much in the years of its existence. Clients send their invoices to the factoring company and they re-mail them with a factoring sticker attached. The factoring company also has a complete collections department to encourage prompt payments. It’s a pretty simple system, really, but it is slow as molasses.
Newer business models are moving the factoring systems online and providing small businesses with a secure website where they can virtually collaborate with the factoring company and your customers, in the factoring process, much like all working in the same office. This results in much faster invoice funding than has previously been the case. In fact, some online factoring companies promise same-day funding. This means that you’ll be funded the day you invoice your customer. Your customers play a role in how quickly you get funded by approving your invoices online.
Another plus with these types of factoring companies is that they can often integrate with your accounting software, going as far as making the proper journal entries so that no one has to manually see to those. All in all, it is possible to make the process completely seamless.
Taking the accounts receivable factoring route is many times the difference between your small business surviving and bankruptcy. Even in those circumstances, you should carefully weigh all of your options first and find a well-respected company to work with. As always, carefully read over all contracts and negotiate the best discount rates you can for your invoices. Receivable factoring is a good stop-gap measure to keep your company in the green long enough to grow it and make some money.
Loading ...