Is your business treading water these days? Is it a constant struggle to keep up with all of the expenses that running a business entails? Are you in need of immediate cash? Accounts receivable factoring is a method of financing that can help you out of the monetary bind that you find yourself in.
What is accounts receivable? In a nutshell it is a procedure whereby a business can sell the outstanding invoices they have at a discounted price to another company or financial firm that is referred to as the Factor.
This financing technique cannot be described as a loan. Instead it is a legitimate transaction that takes place between two companies–one of the companies needs cash that the other one has to offer. Accounts receivable factoring involves the sale of assets, which is to say the invoices you have for your business. It is based not upon your credit score or your credit history but the credit of the customers you deal with.
Accounts receivable factoring is not a new concept in the world of business by any means. In fact it has been around for hundreds of years in one form or another. In the past it was often thought as a last resort when other traditional avenues for financing fell through. The factoring of debts by businesses was viewed as something that only those in financial dire straits decided to do. That attitude has changed. Today businesses do not have to be in distress to decide to factor. Many look to this as a faster means of coming up with capital to grow their businesses as opposed to applying for a bank loan or a credit line.
In fact accounts receivable factoring has made a major comeback due to the fact that many lending institutions are making it more and more difficult for business owners to obtain loans and forms of credit to operate their companies. For many businesses the ability to obtain money through banks is no longer a possibility, which is why they must look to other methods, such as invoice financing (which is another name for accounts receivable factoring). This type of financing is easier to use, offers more flexible terms and makes cash available much more rapidly and readily.
Understanding how invoice financing works is important to your decision of whether you should try it or not. When you sell your invoices to a Factor you do so at a discounted rate. It is usually in the area of two to five percent.
The Factor then will take a close look at the invoices from your customers (who are the debtors in this case) and will evaluate both the legitimacy as well as the creditworthiness of the individuals in order to decide if they have the ability to pay the money that they owe as well as can they afford to pay on time. In most instances an invoice must be paid within 30 days of being issued. You can decide to sell all of your invoices to the Factor or you may wish only to sell a certain percentage of them. Or you may be even more particular and choose only the invoices from select customers.