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.

Financing your business is difficult at anytime, let alone during a recession. Conventional financing is a great way to finance buying assets but it does not work to cover your operating costs. It has limitations in that it has a fixed limit you cannot exceed.

Many businesses run into trouble because their operating costs are variable and are directly related to your sales. As your sales increase your operating costs tend to increase as you need to service your new clients. If your operating costs increase so much there may be no other choice than to seek out business financing, or lose the sale.

Invoice Factoring to raise Finance

What would you do if you knew you could raise the business financing you need, whenever you need? What sort of opportunities could you chase if you knew you could meet all your operating costs? Well, invoice factoring could be the answer for you.

Where businesses often run into cash flow problems is they need to give the clients 30 days to pay. This can be a nightmare for a small business as invariably you can wait anything up to 60 days for your money. And, this puts so much more pressure on you to keep your business operating. While offering terms is common practice, most businesses cannot really afford to. Invoice factoring can be a handy way to help you through each month.

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How to Factor your Invoices

Invoice factoring gives you about an 80% cash payout on what you are owed on your invoices. The best part is that once you sell your invoices to an invoice factoring company they take care of the rest. The invoice factoring company takes over. It chases your customers for the invoice amount and once it is paid in full, the factoring company pays you the other 20% less a small fee for their services.

The important thing when considering accounts receivable factoring as an option is to do business with clients that are reliable and have a good credit record. The other thing factoring companies consider, when looking at your application, is whether the businesses are well run and do not have any legal or tax problems.

Invoice factoring can be an ideal solution for many businesses, but it can truly assist new companies, or businesses that do not have many material assets but who have a client base with a good reputation.

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When the world faces an economic downturn we all face the reality of running out of cash. Your business is going well and turnover is growing according to your plan but during this time of economic tough times your cashflow just tends to run out. You find yourself chasing your customer’s for payment. It seems to be an ongoing circle with everyone chasing their clients for money. There are ways to improve your cash flow during a recession.

Keep an eye on your Cash Flow

Make sure you check your bank balance every day and keep a cash flow forecast of what cash should flow in daily. Be aware that during financially tough times late payments can become commonplace as everyone is in a similar position to you. Having a cash management system in place can give you an early warning that cash flow may develop problems.

Collect Cash Efficiently

Be sure to have an efficient cash collection system in place. If you invoice your clients and they have 30 days to pay, then start collecting the amount due on the invoice on day 31 if the cash has not flowed in yet. Don’t let it turn into a cash flow problem. A strategy you can adopt is to send a reminder notice close to the end of the 30 day grace period.

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In times of financial downturns in the market, loans get harder to get and interest rates can rise daily. By managing your cash flow situation you will know early what your cash flow needs may be and plan accordingly.

Reward Prompt Payment

Consider offering a discount to your clients if they pay within a certain specified time, e.g. 7 days. And, if they are late make sure they know they will pay a percentage of the invoice owing extra for late payment. Make sure all your invoices set these terms and conditions out clearly.

Invoice Factoring is an Alternative

Invoice factoring your invoices is a great alternative for small companies. Instead of playing with paper money in the form of invoices. An invoice finance company will give you up to 80% of your outstanding invoices. They also take over collecting the debt. Once the invoice finance company collects the debt the pay you the remainder of the total invoice amount less an agreed fee.

Confront Cash Flow Problems Head On

Don’t be like so many small business owners and refuse to admit you are heading for financial problems. If you can see trouble ahead confront it and put plans in place to try and head it off. It is much easier to fix a problem early on rather than wait until it becomes insurmountable.

Invoice factoring gives you the flexibility to keep your business competitive and gives you the cash flow to grow. It also helps you to realize your dreams.

Factoring companies look at the credit rating and strength of your clients to determine whether or not to advance you money on your invoices. Your business can use accounts receivable factoring as often or as little as it needs. You are not locked in to long-term contracts and can use invoice factoring services at times when you need that extra cash flow most. Here are some reasons your business may decide factoring receivables can be beneficial:

1.    your cash flow increases without adding to your company’s debt
2.    the invoice factoring process is quick and easy
3.    you receive cash for your accounts receivables within a maximum of 24 hours
4.    you eliminate your responsibility for long billing cycles
5.    you gain working capital without borrowing money
6.    pay off all your operating expenses and any outstanding debts
7.    gives working capital to increase your marketing strategies
8.    gives the security of a weekly reliable cash flow and reduces the stress of wondering when clients will pay you
9.    reduces the instances of bad debts as the invoice factoring company will recover the debts incurred on your accounts  receivables
10.    improves your decision-making capacity about new clients and business
11.    reduces the administration costs necessary for collecting the amounts owed on your accounts receivables
12.    you get working capital without losing equity in your business using your client’s good credit rating to leverage your cash flow.

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There are many reasons a small business fails and invoice factoring can help you get the instant cash flow when you need it. But there are a lot of other things you need to know about why businesses fail to help you avoid being a failure in the future. If you know why businesses fail then you can plan to protect your business and give your business a better chance of success. Here are some reasons why businesses fail:

1.    selling goods or services too cheaply
2.    lack of customer service
3.    staff absences
4.    poor work environment
5.    lack of good public relations
6.    lack of good strategic planning
7.    giving or using too much credit
8.    poor relationships with suppliers
9.    lack of record keeping within your business
10.    failure to recognize business opportunities
11.    failure to plan or get advice to minimize tax
12.    inability to anticipate trends in your market and capitalize on them
13.    inability to recognize competition
14.    lack of control over the quality or cost of your products and services.

Being in business for yourself is rewarding, but it is hard work and takes constant planning to be successful. Invoice factoring is a flexible tool that helps you keep cash flowing through your business. But, you do need to keep up with all the other things that help to make a successful small business.

We all hit hard times and need instant cash. Fast growth, interest rate rises, outstanding invoices and replacing equipment all contribute to the growing need for instant cash. It can all come at once. You may even be a new business. It does not matter why or how – it is usually circumstances beyond your control. May be it is time to look at alternatives for short-term financing.

Short-term Loans or Invoice Factoring?

Short-term loans are an excellent solution – they get you out of trouble fast and it gives your credit rating a positive boost. It shows lenders you capacity to pay a loan off over the long-term.

Invoice factoring and asset based loans are a preferable solution to the cash you need. May be you are just starting your company up and need working capital in a hurry. There are options. And, these include using an invoice factoring service or looking at an asset based loan.

The problem with long-term bank loans are they can take too long to apply for and by the time the financing comes through the opportunity has already gone. Using invoice factoring or getting an asset based loan can get you cash fast.

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Asset Based Loans

Interest rates for asset based loans are negotiable and this is because of the rise in competition that the lenders have. An asset based lender checks into the liquidity of the assets you are using to back your loan. You will also need to provide evidence of a good credit history for the time you have been in business. You need to prove your reliability for an asset based loan.

Factoring Accounts Receivable

The good thing about factoring finance is the lender looks at the credit history of your clients. If you want to factor your invoices then you must produce copies of the invoices and send them to the factoring company.

Next, the lender will look at the credit history of your clients and decide if they want to recoup the invoice amount at the time it comes due. Once the factoring company completes this phase they will send a percentage of the cash you are owed. Now the lender recovers the invoice amount. The final stage is you receive the balance owing on the invoice from the lender less a fee for their services.

It will depend on how quickly you need cash flow on whether an asset based loan or invoice factoring is the best option for you. If time is short invoice factoring or an asset based loan may just be the answer you need.

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Are you under the misconception that your customers see invoice factoring as unsavory? Do you even know what invoice factoring is?Invoice factoring is a useful tool for small business that can help you survive from month to month and grow the business. It is a great way to get cash flow through your business, based on work you have already done and invoiced your customers for.

What is Invoice Factoring?

Invoice factoring is where a small business sells their accounts receivable in return for working capital. It is a simple process and there are three groups involved in successful invoice factoring:

1. Invoicing Company. This is you. Your business has billed your customers for your services and goods for the last 30 days and is waiting to be paid. It is you who wants to convert your monthly accounts receivables into cash flow. For argument’s sake, let’s call you Justice Trucking Company.
2. Customers. These are the customers invoiced by Justice Trucking and they may have up to 90 days to pay. This is a long time for a small business to wait for payment. If customers are late paying their invoices a small business could be in real trouble.
3. Invoice Factoring Company. This is a finance company that is willing to buy your accounts receivables. Justice Trucking has an account with freight factoring companies each month to convert their invoices into cash flow.

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How does Invoice Factoring Work?

Justice Trucking is a growing company with large wage bills, and repair bills o keep their six trucks on the road. They also need to replace two of their trucks that spend more time getting repaired than working. What is difficult is that Justice has hundreds of thousand of dollars outstanding in accounts receivable every month.

It can take up to 3 months to get paid and, in the meantime, this can be the difference between survival and bankruptcy for a small business. Justice can not use their accounts receivables as working capital so it makes sense that they consider invoice factoring as an alternative. In this situation Justice are in a good position to apply to an invoice factoring company to turn those invoices into cash flow to keep them operating.

For a company like Justice Trucking there are trucking factoring companies that specialize in buying accounts receivables that pay up to 80 percent of the invoice values. Once Justice sells their invoices, they have the working capital to get through the next month and buy the two trucks they need.

Justice Trucking’s customers now pay the trucking factoring company the amount they owe you. Once the full invoice amount is paid, the finance company pays out the balance to Justice Trucking less a fee for their services.

This type of financing does not suit every business and you must be sure that invoice factoring is the best thing for your business and your customers. Do your research before you decide whether invoice factoring is the right decision for you or not.

If you are in business, you can always use more business cash flow. It is tough waiting for clients to pay their invoices. You can always sell your accounts receivables to finance you business capital to get you through each month.

Depending on the business you are in it can take 60 days to get paid. If you are carrying invoices worth thousands of dollars each month, it is hard to get through week to week; especially if you are just starting out.

You have some choices. You can either factor or discount your invoices for immediate business cash flow.

Invoice factoring is the outright sale of you accounts receivable. The finance company pays you a percentage of your invoice totals, collects the debt and the interest. They also collect a discount fee as well.

Invoice discounting is selling your accounts receivables but you still collect the debt from your client. The administration of the debt stays with you.

How to choose between Invoice Factoring or Discounting

So how do you choose between the two – is invoice factoring or discounting the right thing for your business. Here are some things to think about before you make a choice:

1. Do you want to be bothered with chasing clients for money? How much does it cost you to chase your money? Do you employ someone purely to remind clients their account is overdue? If you want to chase your invoices, then discounting your accounts receivables may be the right decision. But if you don’t want to staff a collection service to recover your money, then invoice factoring takes the hassle out of getting your invoices paid. Remember to weigh up the costs of both options before making a decision.

2. Does selling your invoices to a finance company raise concerns that your customers would rather deal with your company directly? With invoice discounting, your customers need never know. But, the invoice factoring finance company will call your clients to confirm the amount they owe on your invoices. If you are worried how this may appear to your customers then invoice discounting may suit you better.

3. How much cash do you need? Look at it this way. How much cash do you need and how much do you need it? The least expensive way is to do everything yourself. Invoice factoring is the most expensive alternative as the finance company takes the debt over completely. It all depends on how much time and whether your business is setup for debt recovery. If it is, maybe invoice discounting is the way to go.

4. Consider how many accounts receivables you hold. How diverse is your client base? Does any one customer make up the bulk of your total invoice amount? Businesses that discount their invoices are larger companies with a portfolio spread across a diverse range of clients. Most of these companies have a fully functional debt collection department in place. Can you compete with this?

Take all these factors into account when you assess whether invoice factoring or discounting is the best alternative for you. Whichever one you choose, you business finances will be in better shape and it will help your business grow.

It is often difficult to secure financing for your small business whether times are good or bad. Banks and traditional lenders usually require a few years business financial history to back you up before they will give you business finance. To get small business loans you need collateral to put up against any business financing they agree to – this means putting up real estate or equipment to give you the cash flow to grow your business.

Many small businesses (e.g. employment agencies and consultancies) have trouble getting business financing as they do not have these assets to put up as collateral.

What you may not know is there are other ways to get financing such as accounts receivable factoring to get the cash flow you need. Invoice factoring can be an excellent solution for a business that waits between 30 and 60 days to get paid on each and every invoice they raise.

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How Accounts Receivable Financing Works

How accounts receivable financing works, for example, is an employment agency bills a client for $350,000 with the invoice due in 60 days. This is a lot of money for a small business to carry for a couple of months. While waiting for payment, there are still the everyday business costs and staff need paying on a regular basis.

If a small business does not have enough capital in reserve then it will run into obvious problems. What you can do is get advance payments by factoring accounts receivables.

It is a simple process once you have set up an account with a factoring broker. All you do is submit the invoices you want to factor with the aging report. Then the factoring broker verifies your invoices and the cash advance arrives in your account. From then on, the factoring company handles recovering the value of the invoice

Factoring companies pay between 70% and 90% of the total value of the invoice upfront. Factoring finance gives the business the cash flow to operate as usual. When the client pays the full invoice balance, the factoring service pays the amount outstanding on the invoice to the business minus a factoring fee. Factoring brokers charge a fee that varies from between 1.5% and 4.0% for an invoice due within 30 days.

How to Qualify for Accounts Receivables Factoring

It is a completely different process to qualify for accounts receivable factoring compared to applying for a loan. To qualify, a company needs to be reputable with a good trading history, not have any liens and a good client base of customers that pay.

Factoring companies take your invoices as collateral for a cash advance on those who owe you money. This provides cash flow to companies whose only assets are their clients and a good reputation.

Invoice factoring is an excellent way of getting the cash flow needed for a startup business over the first few years. When you are starting out you may find the more traditional lenders say no. Another challenge can be your credit profile and you may be at the maximum limit of your credit cards – it costs heaps to start a business up.

If the banks turn you down for a small business loan, consider invoice factoring for financial success.

Benefits of Factoring you Account Receivables

The biggest benefit to factoring your accounts receivables is there is no minimum time limit on how long you have been trading for. In realistic terms, invoice factoring is selling your account receivables instead of waiting for up to 120 days for your clients to pay. It gives you instant cash flow and factoring companies take over recovering the invoice.

What a great idea – your invoices are a source of instant cash to help your business to survive and grow into the future.

Centuries ago in England, factoring or the purchasing of accounts receivable was a cornerstone of trade, allowing companies to continue their business unhindered while waiting for customer payment for goods. Today, it is one of many options available to businesses, large and small, in managing their financial picture. Banks now dominate the financing of businesses on a credit basis and sell “total package” banking, so many small companies and their financial advisers don’t consider the advantages of invoice factoring. Larger companies often use factoring for purposes such as transferring a portion of their accounts receivable to cash for a stronger financial position.

Companies that aren’t aware of what invoice factoring really is and how it can be used may find themselves in an unnecessary “credit crunch” as they grow, or struggling in a turnaround without knowing where to look for interim financing. The answer to their problems may be sitting right their on their accounts receivable books. While English Common Law, the basis for many countries’ legal systems including the US, required notification of factoring to the debtors, in the USA many state laws now allow the debts to be transferred without it.

For those without a financial background, the concepts of accounts receivable and invoice factoring can be explained like this: in business, it is customary for a company to allow customers a period of time to pay their bills, often up to 60 days. In effect, the selling company is lending money to their customer as a courtesy to facilitate business. If that loan is something the company can ill afford, especially if the company has paid for raw materials or services which were provided to the customer, they may in fact be paying interest on a loan to finance the extension of credit to the customer. Invoice factoring companies can step in and not just provide another loan as a bank would, but actually purchase the accounts receivable, or debts, outright. There are a number of ways that they do this, but in essence this is the benefit of invoice factoring – a company gets the money they are owed, less the costs of factoring, in a much more timely manner.

Depending on how the factored receivables are sold, the customer may or may not know that the debt has been transferred. Factored invoices are usually the highest quality ones, companies with an excellent credit rating, and if they are larger established companies they are probably familiar with the process of dealing with the transfer of invoices. A proper, straightforward letter of explanation should make them aware of the situation, and so long as the goods and services are properly provided they should have no concerns about the transfer.

Factoring companies provide a number of services as part of the purchase of invoices. They evaluate the credit of the companies to whom the invoices are sent, and they may purchase insurance to protect themselves should problems arise, allowing greater acceptance of risk. As the owner of the debt, they will take over the entire process of receiving the debt, and the seller will simply have cash in the bank.

Invoice factoring companies can be large or small. Large, well-known capital companies such as GE Capital provide factoring funds, and many companies and brokers providing invoice factoring services can be found on line. Gathering information on how to combine turning a portion of your invoices to cash with other financing techniques is an important step, and many invoice factoring companies will be glad to help explain the process and costs to you and your financial and legal advisors. It’s important to note that invoice factoring should not be used in every case because there are costs involved in transferring the invoice risk to the factoring company, and factoring low-profit invoices may not be as beneficial in some cases. Companies using invoice factoring for the first time will need to understand how it should appear on the books, usually simply as cash on hand, eliminating reference to the receivable entirely.

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Business officials think invoice or factor discounting consist of revenue and expense problems. Several intelligent business personnel use the dynamic service in growth development. You can achieve growth through factoring and this article will give you some key tips on how to do it yourself.

European business professionals use Factoring as part of their financial protocol. However, not many American business professionals use or know the details of Factoring. Europe practiced factoring since the late Roman’s established a loan fund based on promissory notes to finances journeys to America. The loan’s provided from the Factor were paid back with profit made from the American journey. The word Factor describes a person or business investing money in someone else’s new business or financial ventures.

The Assignment of Claims Act under Section 31 of the U.S.C. 3727 states,
“A contractor may assign its rights to receive payment due as a result of performance”. The assignment of invoices represents factoring in practice.

Factoring sells ‘account receivables’ for money now, instead of waiting for customer’s money in 1-3 months. Companies develop their growth without taking out more debt by properly using the factoring system.

Companies use reliable foundations such as factoring to fund better growth capabilities. Small businesses deal with large value contracts (n the millions) through government and corporate sectors.

Manufacturers, Distributors, TEA (Temporary Employment Agencies), Contractors, Importers and other similar type companies use the Purchase Order Funding portion of factoring. The standard operation protocol of factoring companies does not include financial statements.

Banks base their lending decisions on credit histories, revenue and secured property options. Factoring companies decide intent for investment based upon the individuals’ or company’s cliental-credit worthiness. Balance sheets omit liability because factoring investments are not loans.

Government contracted factoring takes 3-4 weeks, while other types approve within 48 hours. The Factoring-company receives the client’s invoice and wires money within a few days.

Factoring companies will not chance growth capabilities. The company takes on work in screening new vendors, collect invoices and handle accounts receivables related to their investment. The IRS subsidizes all costs involved in factoring because costs are tax deductible.