Businesses looking to expand, generally only consider two options, getting a loan or using the profits they have already generated. Both of these can be great choices under the right circumstances.  If a company has been in business long enough to qualify for a loan, doesn’t already have an incredible amount of debt and has enough profits on hand to fund their growth this getting a loan or using profits already on hand is fine.

However, not every company will qualify for either of these options. A business may be new or have poor credit. They might also be cash poor and unable to fund their growth themselves. For these businesses accounts receivables factoring might not only make the most sense but it may be their only option.

Debt is the method that many businesses use to support their growth and even their day-to-day operations. Monies received this way may go toward hiring more workers, purchasing more inventory or financing an upcoming job. However, considering today’s economic climate, it is increasingly difficult to qualify for a loan. If a company does not have stellar credit and have not been in business a sufficient amount of time, they may not be able to find a bank that will give them money.  Having too much debt can also be risky. Accounts receivable factoring is a way for companies to get the money they need without having to borrow it.

Accounts receivables financing involves a company selling their outstanding invoices to a factor. A factoring company will typically offer to purchase them for between 85% and 95% of the invoices full value. This money is paid to the company upfront and can be used for whatever purposes they want. Purchasing inventory, paying employees, hiring additional staff or funding the next job, are all options.

After the factor has purchased these invoices, they then begin to collect on them. These monies are then given back to the company that originally held them. The factoring firm will hold back an agreed upon fee as their payment.

Factors are paid based on a number of things. The credit worthiness of the invoice holders and the payment period all affect how much the factoring company will charge. There are also other factors. For example, invoices due in 30 days would be less expensive then debt due in 60 days. This is because it will take longer for the factor to get their money back. There might be other charges as well. These will be dependent on the particular factor.

It is important that all payment agreements are discussed and fully understood before any contract is signed. This will prevent any misunderstandings prior to the contract being signed.