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.
Advantages of Entering into 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.
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.
Quick Financing: Invoice Factoring is one of the quickest ways to get a cash injection into your company. Most of the application process can be completed via the internet, telephone and fax.
When you find yourself entertaining the idea of an AR Factoring arrangement, be sure to calculate in the costs of this type of financing. While the cash injection is needed, you need to make sure the costs will not be prohibitive. Some industries work on an extremely tight margin today and the 1.5% to 5% discount to your invoicing may eat up too much of your profit so be aware of your profit margins and your costs.
Weigh your advantages with the drawbacks prior to beginning to work with an AR Factor. The reputable Factor Companies will allow you full disclosure of all costs and fees in relation to the facility. Be sure to consider all points.
Does your company really need the financing to keep the company healthy or take advantage of a specific opportunity?
Evaluate the Business Plan and its ability to incorporate additional financing costs. [Should you not have a Business Plan, be sure to complete one prior to entering into the Factoring agreement.]
Do you have the infrastructure to handle more business? If you can not handle more business the additional challenges can be frustrating and detrimental to your company.
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?
Remember to review all documentation prior to entering into your Factoring agreement. The Factoring industry is not as well regulated as the banking industry so there is much room for unfavorable terms that may not be in your best interest. Though this is the case, having an Accounts Receivable Factoring arrangement may very well be the best thing you have ever done for your company and keep a health cash flow.
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.
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