Many business owners would much rather build their companies without debt and would prefer not to take out a loan.  While debt can be very beneficial because it provides businesses with the capital they need to grow and stay afloat, it has two very big strikes against it; it has to be paid back and it’s risky.  When a company develops too much debt, it takes very little for its financial standing to be ruined.  Most owners would prefer not to go this route if at all possible.  Others will find that it is difficult to get a loan.  They may have bad credit or simply haven’t been around long enough to qualify for a business loan.  Accounts receivable factoring is one way for a company to grow without using loans and accumulating new debt.

Invoice factoring, purchase order funding, and receivables financing allow a company to leverage business they have already earned for upfront capital.  The process is actually pretty simple.  To begin, a business will contact a factoring company about selling their receivables accounts.  This firm will then determine whether or not it is a good risk.  If they decide that it is, they will purchase those receivables at a discounted price.  This is often between 80-95%.  A company is a good candidate for factoring if the people or businesses that owe them money have good credit.  This is crucial for any potential factor because they will be advancing the money to a company and will want to make sure they will be able to get it back.

Perhaps the biggest benefit that a company gets from selling their receivables, is receiving money from jobs they have already completed far sooner than they normally would.  This gives them the money they need to grow and maintain their business.  In fact, for some companies this is the only way they can stay in business.  The factor will then collect on the invoices from the people that owe them.  After the factor collects the invoices, they give the money back to the company that originally sold them the receivables, minus a predetermined fee.

The process is very easy and it allows businesses to build and expand without assuming a loan or new debt.  They can then use their current accounts with outstanding balances to get the money they need, advanced to them.  It is important to note that the company selling their receivables has credit worthy customers.  If not, they will have a difficult time finding a factor who will work with them.