Factoring 101: Your Introduction to Accounts Receivable Financing
Businesses often experience difficulties with cash flow due to late-paying clients and other unforeseeable situations. Accounts receivable financing, also known as invoice factoring, provides a means of receiving a quick influx of capital that you can then use to pay your employees, purchase needed supplies, mount an advertising campaign, or expand company operations to take advantage of sudden opportunities. Here are some basics to keep in mind when considering accounts receivable financing to help grow your business
How Invoice Factoring Works
When purchasing accounts receivables from your business, factoring companies take into account the age of the invoices, with newer invoices worth more than older ones, and the size and standing of the companies or corporations that owe you the money. After determining a price for the accounts receivables, factoring companies send you an advance of 70 to 90 percent of their value. The factoring company takes on the responsibility of collecting the debts. Once your clients pay their bills, you receive the balance of the value of the invoices minus the fee for the factoring service.
Benefits of Invoice Factoring
Accounts receivable financing allows companies to turn outstanding invoices from slow-paying customers into funds to use in growing their business. Unlike the process of acquiring a traditional loan or line of credit, the application process is simple and quick, so that you have cash when you need it. Because the approval process involves an assessment of your clients instead of your business, you have a better chance of approval even if your company is new and has not yet built up a high credit rating. The factoring company assumes the task of bill collecting so that you are freer to focus on other aspects of your business.
Industry analysts point out that despite the higher costs associated with invoice factoring compared to traditional bank loans, many well-known, rapidly growing companies turn to accounts receivable financing when they find it necessary. The key is to look for transparency in terms of rates, fees, and contracts.
For more advice on accounts receivable financing, look to Desert Star Commercial Consulting.