Accounts receivables factoring is a very good way for companies to fast track needed working capital.
Traditional commercial financing, particularly a bank loan, generally requires a fair amount of time. A company has to first apply for the loan, offering their most sensitive financial information. This can be a bit troublesome and time consuming. By the time a business receives notification on whether or not they will receive the requested monies, it may be too late for them to utilize them. When a company is in need of fast cash, there are few better places to get it than through accounts receivables financing. It is possible to generate funds in only a few days using this method.
Receivable factoring is not only fast but it is relatively easy. This finance method requires a company that has outstanding invoices from credit worthy clients and a factor that has the money and willingness to purchase them. The entire process takes between 1-7 days. It can also be utilized by companies that have poor credit and who haven’t been in business for very long.
Factors purchase receivables because it is profitable for them. They receive a fee for doing so; exactly how much will depend on the factor. Some charge as little as 1% of the value of the invoice. Others charge more.
As stated above, the accounts receivables loan process is fairly easy. A factor purchases a company’s receivables at a discounted rate, roughly 10% to 30% less then what they are worth. They then act as a collection agency. All payments on the outstanding invoices go to them. They will also reach out to customers that are late making their payments. The process is a bit unique in that the monies they collect actually go back to the company they purchased the invoices from, minus their fee of course.
The fee charged by a factor is dependent upon certain criteria; the due date of the invoices, the credit history of the invoice holders, and experience and competitor pricing, will all affect a factor’s fee.
It is important for businesses looking to sell their accounts receivables to find a great company to work with. This will determine the success or failure of the transaction. If the agreement turns out to be a bad one for the seller, they may end up spending much more money then they intended. Their relationships with their customers might also become jeopardized. This is because the factor may be in communication with a company’s customers. If they are unprofessional or rude, this can cost them business. To avoid this, it is very important that companies take special care to find a trusted factoring company.
Accounts receivables factoring allows companies to generate capital without taking out a loan and without waiting months to receive the money they likely need today. Instead, they can raise money in a matter of days.