Accounts Receivables Factoring: How To Finance An Existing Business Without A Loan

AR FactoringContrary to popular belief, it is possible to finance an existing business without a loan.  For many years, a debt was an accepted and even recommended way, for a business to generate the capital it needed for maintenance and even growth.

The recent economic crash revealed the folly of this approach.  Companies that had taken on substantial debt were no longer able to pay it back when customers stopped coming in.  Many were forced out of business because of this.  Due to the fact that there were few known alternative options, many executives knew of no other way to generate the capital required to stay afloat.  A lot of companies overlooked or knew nothing about accounts receivables factoring, which was to their detriment.  It may have made it possible for many companies to stay in business.

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Accounts Receivables Factoring: How To Finance An Existing Business Without A Loan

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Receivables factoring is a rather simple form of commercial financing.  It requires very little, mostly that a company has clients with good credit.  There is little consideration given to how long a company has been in business or their credit history.  Instead, they can “piggyback” on the credit scores of their clients.  Accounts receivables factoring isn’t a good option for every business, but it is for a great number of them.

When a company chooses this option, they will need to locate a factor.  A reputable, well-established one is ideal.  Factors routinely purchase accounts receivables (invoices) at discounted prices, generally for 70% to 90% of their value.  They then assume the role of a collector.  All payments or invoices are sent to them instead of the company which sold them.  When necessary, they will send out billing reminders and make phone calls to delinquent accounts.  After they have collected the invoices, they will return the monies to the company they bought them from, although not all money will be returned.  The factor will retain their fee and any money already paid toward the balance of the invoices.

The factor’s fees will be dependent on a number of things, including the age of the invoices, when they are due, the credit history of a company’s clients, as well as their own experience and reputation.  There will be other considerations as well.  These are just a few of the primary ones.  It is very important that companies are careful about the factor they choose and the contract they sign.  A factor will come into contact with a business’ clients and if they are rude and/or unprofessional, it can threaten that relationship.  The contract is also important because an unfair contract can end up costing a company a tremendous amount of money.

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