Should You be using Accounts Receivable Factoring?
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by: WadeHenderson
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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
Accounts Receivable Financing is the practice of selling your outstanding invoices or at a discount to finance or factoring company. The Accounts Receivable Factoring Company will then assume the risk on the Receivables in exchange for a cash advance to your company. The amount of cash that will be advanced is directly proportionate to the age of the invoices. The older the invoice is the less it is worth in the Factoring Companies eyes. In fact, if you have invoices over 90 old, the AR Factoring Company will generally not wish to purchase it. In your quest for Accounts Receivable Financing options, be aware the loan classification may be exchanged for Accounts Receivable Factoring, Invoice Factoring or Accounts Receivable Funding.
So Why would You Want to Factor Your Invoices?
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.
Wouldnt 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 uses for that cash.
Speedy Underwriting: Accounts Receivable Factoring can go from application to funding in a matter of days for when the financing is critical. The application is relatively simple when compared to traditional Commercial Finance.
When weighing the benefits of Accounts Receivable Factoring you also have to take a look at the drawbacks as well. The most considerable concern you may find is the cost since most people are familiar with bank financing, Accounts Receivable Financing does come at a premium price in comparison, due to the risk component for the funder. This premium cost can add up over the year and will come right off your bottom line. You can expect the fees to be from 1.5% per month up to 5% depending on the industry and the deal itself.
When contemplating entering into the AR Financing agreement, be sure to take the following points into consideration:
Is the financing really needed? Is it necessary to your company to have it to operate or to gain a competitive advantage?
Will the addition of AR Financing compliment your business plan? [If you do not have a business plan, make one. This is an essential part of knowing the direction you want to lead your company to.]
Are you confident that you can manage the additional business and challenges this will present?
Have you exhausted all other options for financing your business so that you are making an educated decision
How it the economic climate? Is it wise to take on the financing?
Entering into an Accounts Receivable Financing arrangement can be the best thing you have ever done for your company because without a strong cash flow your company will not be able to survive. Many companies are using Accounts Receivable Factoring more today than ever, mostly due to the fact that banks are less interested in giving Operating Lines of Credit without material security. If you put $500,000 in a fund with them they may give you a line of credit for $250,000. That being said, getting a Operating Line of Credit as a Factoring Line can be a good step toward getting bank financing in the future.
There are many alternatives to bank financing today, do your homework in finding the best option for your situation and keep an open mind. Banks are not always the best answer and they certainly are not the only answer. Financial brokers today have a vast array of products to fit most circumstances and the best ones are up to date with the latest trends and options so they can place your financing with the best product on the market.
About the Author
Wade Henderson - very Professional - 15 yrs in the Business Finance Field - reputation for getting the deal done. IMMFinancial.com construction factoring non recourse factoring This and other unique content 'Accounts Receivable Factoring' articles are available with free reprint rights.
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