Your company may or may not be familiar with accounts receivable factoring. If you haven’t, now is a good time to learn all that you can about it. It is becoming an extremely valuable alternative for businesses looking to raise money, in a world where it is becoming increasingly difficult to obtain a loan.
At one time, if a company had good credit and had been in business a decent amount of time, it was possible to find some bank to give them a loan. Though the process was not easy, a business with the aforementioned credentials could be fairly confident that they would qualify for a loan somewhere. That is no longer true.
Today, it is difficult for businesses even with good credit, to obtain a loan. Those with questionable credit histories or who are just starting out might as well forget about this form of financing because banks are holding on tighter then ever to their money. This results in fewer options for some businesses and spells the death kneel of others. If a company is in a cash crunch and can’t borrow their way out of it, there is little chance that they will be able to stay in business.
Because many companies are unaware or at least unfamiliar with good, alternative options, they simply close their doors. However, this might not always be necessary. Accounts receivable factoring can be a good way for some companies to leverage their invoices for fast cash which can be used to keep their operations running.
Accounts receivable factoring (also known as receivables financing) involves a business selling their invoices to a company known as a Factor. This Factor will purchase them at a discounted rate. Once the invoices are sold, they will collect them, sending out letters or making phone calls. Whatever payment agreements were in place prior to the sale of the invoices, will remain in place. This helps to avoid problems between a company and their customers.
After the invoices have been paid, all monies collected goes back to the company which originally owed the invoices. The Factor will obviously charge a fee. This will differ based on the organization’s fees structure. The going rate is between 3%-5%.
Business loans can be good way for a company to get cash when they need it. If they have enough time to wait out the lending process or already have an established line of credit somewhere, then accounts receivable factoring may not be needed. However, it is important to remember that all debt is risky. It has to be paid back. If it isn’t, a business might have to close down or give back important equipment they need to operate.
When it is at all possible, it is a much better option to finance ones business without debt. Accounts receivable financing allows a business to do that. Instead of taking out a loan, they sell the invoices for work already produced, allowing them to get money right away. They pass on the duties to collect those invoices to another company receiving the amount of their invoices in full, all for a 3%to 5% fee.