Accounts
receivable funding is a solution that allows business owners to quickly turn
invoices into working capital. Instead of waiting and waiting for months or
even years for customers to pay their invoices accounts receivable factoring
lets business owners get an advance on those invoices and use that cash for
pressing business needs instead of waiting for weeks or months for customers to
pay their invoices.
How accounts receivable factoring
works?
Usually
a business sells goods and services to its customers either in cash or on
credit. In case of credit, the business sends an invoice to the customers which are typically paid back to the business as per terms of credit which varies from
business to business and the time period can range from a week to 3 months or even
more.
Instead
of waiting for the customer to make a payment on due dates, a business can sell
its account receivables at a discount from their invoice value to the
specialized company and receive cash immediately.
The
key things that factoring companies look at when considering an application
include:
●
Is this a business to business (B2B) or business to government(B2G)
invoice for a product or service that has been delivered or completed?
invoice for a product or service that has been delivered or completed?
●
Is the account debtor or customer able to pay the invoice?
●
Does the business actually have accounts receivable?
Factoring companies' main concerns are not how many years a company has been in business
or what is the business owners’ credit score. The main concern is that the
invoice factoring company is buying will get paid or not. For this reason,
invoice factoring is proven a very valuable tool for growing business that needs
a finance partner to improve cash flow.
How can it help your small business?
With
the available cash provided by accounts receivable factoring, businesses can
take advantage of new opportunities for growth. Adding equipment or staff,
opening new markets, or introducing new products are all much easier with cash
in hand.
Accounts
receivable factoring is a useful source of financing for businesses that may
not qualify for a business loan or business line of credit. You might wonder
how much would it be to factor your receivables for your business. Even though
factoring does not acquire any debt, like any form of financing, there are
invoice factoring fees.
Why do companies use accounts
receivable factoring?
Accounts
receivable financing is an ideal choice of financing for many companies. Those
in a startup or growth phase are often ineligible for traditional bank
financing. However, these companies easily qualify for factoring. There are
also, situations where factoring receivables is better than bank financing. As
you can get services including:
●
Quick quotes
●
Fast funding
●
Growth opportunities
●
Customer services
How accounts receivable are priced by
the factoring company?
The
companies charge what is known as “factoring fee”. The factoring fee is a
percentage of the number of receivables being factored. The rate charged by the
companies depend on:
●
The industry that your business is in
●
The volume of receivables to be factored
●
The quality and creditworthiness of the company’s customers
●
Days outstanding in receivables
Additionally,
the rate depends on whether it is recourse factoring or non-recourse factoring.
Factoring companies usually charge a lower rate for recourse factoring than for
non-recourse factoring. When the factor is bearing all the risk of bad debts, a
higher rate is charged to compensate for the risk. With recourse factoring, the
company selling its receivables still has some liability to the factoring
company if some of the receivables prove uncollectible.
In
essence, the easier the company finds collecting the receivables is likely to
be, the lower the factoring fee.
