What is Accounts Receivable Financing ?

In its simplest terms, accounts receivable financing is the selling of your outstanding receivables at a discount to a factoring company.  Accouts receivable financing is also known as accounts receivable factoring or accounts receivable funding.  In this transaction, the factoring company pays you a percentage of the accounts receivable up front, typically 75-80% of the total, with the remainder to be paid once the invoice has been paid.  The factoring company will charge you a nominal fee for the transaction, but will handle the collections of your accounts receivables that you have sold to them. Typically, the shorter the time it takes to have the invoice paid, the smaller the factoring fee.  So, for companies that have clients who quickly pay their invoices, the fee could be between 1-3%. 

The process of accounts receivable financing is quite simple

Your business will sell your accounts receivable, either all or a portion, to a factoring company in return for a discounted rate.  The factoring company will generally wire you the funds the same day or the next day once they have received their proper paperwork, and then they will handle the collections of the invoices.  Once the invoices have been paid, the remainder of the invoice, minus any applicable fees will be paid to your company directly.  Most factoring companies will provide you with a consolidated monthly statement so that you can review the transactions and for your company’s record keeping.

Benefits of Accounts Receivable Financing

Pass off Collections: Outsourcing your accounts receivable management to another company can free up your previously dedicated accounts receivable resources to focus on other more productive activities such as selling.  Once you sell your accounts receivables, the factoring company manages collection of the payment.

Free up Working Capital: Most small businesses have a need for additional working capital, yet have their assets tied up and are unable to qualify for additional financing.  Accounts receivable factoring can provide your company with cash as quick as the same day for invoices submitted.  This cash can then be used for your customary business expenses, to meet payroll or for business expansion needs. 

Quick Financing: Accounts receivable financing will not require a business plan, long applications, credit checks, tax statements or other financial information.  Accounts receivable factoring is not considered to be a loan, so there is much less qualification work involved to establish a relationship with a factoring company.  Also, the approval process can generally only take a few days instead of a few weeks when compared to traditional financing.

Assistance with Slow Paying Customers: One of the challenges that many small businesses face when trying to grow is that many of the larger customers that they are looking to partner with have slow paying accounts receivable policies.  For example, many larger retailers have a standard payment policy of 90-120 days.  If it requires a substantial amount of capital to fulfill their product orders, your small business could be placed in a cash crunch simply by accepting a great new, large retail customer. 

Selecting Factoring: Many factoring companies will allow you to pick and choose which invoices you send to them to factor.  This can mean a substantial cost savings to your business and will allow you to factor only the larger invoices, or the ones that you know in advance are going to be paid in the mid term, giving you the cash that you need and helping to justify the fees associated with factoring.

Once you are ready to consider factoring as an option for your accounts receivable, ask the following questions of the companies that you are interviewing:

·        Is the money needed necessary for your company’s survival? Or, are you looking to take advantage of a business opportunity?

·        Is your business in need of expansion capital? Have you explored other more traditional methods of financing?

·        Have you reviewed the real cost of factoring your accounts receivable? For example, what percentage of your current repeating customers pay on time, how many pay late and do you traditionally have any issues with customers who don’t pay?

·        Have you researched multiple factoring companies to determine their rates and services before selecting one?

Getting financing can often mean the difference between a company closing its doors and staying open.  While it can do more than just prevent bankruptcy, many business owners are not aware of the process or its benefits.  Spend the necessary time to investigate the companies you are working with, inspect the contracts prior to signing, and work to negotiate discounted rates for your business.

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