You do not have to be in business long to learn how much of a struggle it can be to get a Commercial Line of Credit from a bank to help grow your business or cover shortages of cash flow. Many times the owners of these companies will find an alternative to the bank loan that they have been chasing. This alternative is called Accounts Receivable Factoring and it is getting more popular everyday, especially with the banking industry clamping down on their requirements making it even harder to get a Commercial Loan.
AR Factoring Defined
AR Factoring is basically when you sell your Receivables to a Factoring Company at a discount. In this circumstance, the AR Factoring Company will advance you funds based on the discounted dollar amount of your outstanding invoices. The Invoice Factoring Company will then collect the funds from your customer at the face value of your invoices. In most cases the value placed on any give receipt will vary upon the DSO (Days Sales Outstanding) due to the risk of non-collection being higher on older invoices. Again, due to this risk factor, invoices over the 90 day mark are generally not funded. While not a fully interchangeable term, Accounts Receivable Factoring is also referred to as Accounts Receivable Financing or Accounts Receivable Funding.
Advantages of Entering a Factoring Relationship
Pass off Collections: If you do not have to be concerned with chasing after accounts that have passed their due dates or just the practice of managing multiple accounts which can take several working hours depending on the size of your account base, you can be more responsive to the needs of your business rather than calling on collections.
Would not you rather have the cash in your hand rather than sitting on the books? Very few companies like to carry Accounts Receivable, but it is a requirement unless you enter into a factoring arrangement. Seeing that you have the majority of your money tied up in your books where you can see it, but not touch it can be very frustrating, especially when you have been using that cash.
Fast Financing: AR Factoring itself will not require a business, plan, audited financial statements or tax returns generally. It can be put together in a matter of days including Funding
Most certainly there are several benefits to Invoice Factoring, but like most things there are positive and negative attributes for your business. The cost factor of this type of financing can be higher than traditional bank financing. You Accounts Receivable will be deducted from its face value with takes profit right off the top of every invoice you generate which can add up to a reasonable amount over the year.
When contemplating entering into the AR Financing agreement, be sure to take the following points into consideration:
– Are there other more viable options available that will be better suited for your needs?
– How does the Accounts Receivable Factoring fit in with your Business Plan in terms of process and margins? [Your Business Plan is an important element to your business, be sure that you have one.]
– Are you confident that you can manage the additional business and challenges this will present?
– Did you research your Commercial Finance options thoroughly to make an informed decision?
– What kind of shape is your industry in? Would now be a good time to take on additional financing?
In today s climate of economy cash flow is King. Your Accounts Receivable Factoring can mean your businesses survival or demise. Review all options prior to your committing to a particular program. The reason there are so many options in the Factoring Industry is because it is not as regulated as the banking industry. Be sure to deal with reputable Factoring Companies "review documents and fees. Many times, using an Accounts Receivable Factor will lead to you being able to secure bank financing in the future.
Banks are far from the only game in town. There are many options available to companies today and when your bank says no to your application for financing, it is not that your company is not good; it is that you do not fit the cookie cutter loan programs they have. Commercial Finance Brokers have access to Accounts Receivable Factoring, Purchase Order Finance and Export Finance options in addition to other Commercial Finance products. And since they are in the market every day they will know what product will fit you the best.