You may or may not be familiar with Receivable Factoring. If you aren’t, now is a great time to get educated and learn how it’s a great way to fund your business. Receivable factoring is a valuable alternative for businesses looking to raise money. Particularly in an economy where obtaining a bank loan is extremely difficult.
Before 2008, if a small company had good credit and had been in business a decent amount of time, it was possible to find a bank to provide working capital. As you know, that is no longer the case.
Banks lack of small business lending results in fewer options often leaving a company scrambling to find cash fast. Too many companies are unaware or at least unfamiliar with real alternative choices. Receivable factoring is the perfect working capital solution for many businesses. Factoring companies look at the credit of your client, not your own. This means start-ups, client concentration issues, IRS liens and other challenging funding situations are often not an issue and your business can be funded.
Receivable factoring (also known as accounts receivable financing) involves a business selling their invoices to a company known as a Factor. The factoring company will purchase them at a discounted rate. Once the invoices are sold, they will collect them with a soft touch, sending out letters or making phone calls. Whatever payment agreements were in place prior to the sale of the invoices, will remain in place. Keeping your relationship solid with your client is the priority.
After the invoices have been paid, all capital collected goes back to the company that originally owned the invoices. The factoring company will charge a small fee. The cost will differ based on the organization’s fees structure. In addition, factoring can come with credit protection giving your business a significant layer of financial protection.
When it is at all possible, it is a better option to finance a business without debt. Accounts receivable factoring allows a business to do that. Instead of taking out a loan, they sell the invoices for work already produced, providing them with the money needed right away.