Being in business for yourself you are fully aware of the difficulties when trying to get funding your growing business or to help out when cash runs a bit low. Many times the Line of Credit you get from your bank is just not enough. As a result, many times business owners will look for options and will come across Accounts Receivable Factoring. But is Accounts Receivable Factoring right for your company?
Accounts Receivable Factoring: What it is
AR Factoring is basically when you sell your Receivables to a Factoring Company at a discount. In this circumstance, the AR Factoring Company will advance you funds based on the discounted dollar amount of your outstanding invoices. The Invoice Factoring Company will then collect the funds from your customer at the face value of your invoices. In most cases the value placed on any give receivable will vary upon the DSO (Days Sales Outstanding) due to the risk of non-collection being higher on older invoices. Again, due to this risk factor, invoices over the 90 day mark are generally not funded. While not a completely interchangeable term, Accounts Receivable Factoring is also referred to as Accounts Receivable Financing or Accounts Receivable Funding.
What Benefits are there to Factor Your Receivables?
Sell off your Collections: The BPO industry is booming due to outsourcing because when you farm out your Accounts Receivable Management you will be better able to concentrate on the operations and growth of your company rather that focus on the collection of funds.
Wouldnt you rather have the Cash in your hand rather than sitting on the books? Very few companies like to carry Accounts Receivable, but it is a requirement unless you enter into a Factoring arrangement. Seeing that you have the majority of your money tied up in your books where you can see it, but not touch it can be very frustrating, especially when you have been uses for that cash.
Fast Financing: AR Factoring itself will not require a business, plan, audited financial statements or tax returns generally. It can be put together in a matter of days including Funding
When weighing the benefits of Accounts Receivable Factoring you also have to take a look at the drawbacks as well. The most considerable concern you may find is the cost since most people are familiar with bank financing, Accounts Receivable Financing does come at a premium price in comparison, due to the risk component for the funder. This premium cost can add up over the year and will come right off your bottom line. You can expect the fees to be from 1.5% per month up to 5% depending on the industry and the deal itself.
Weigh your advantages with the drawbacks prior to beginning to work with an AR Factor. The reputable Factor Companies will allow you full disclosure of all costs and fees in relation to the facility. Be sure to consider all points.
Does your company really need the financing to keep the company healthy or take advantage of a specific opportunity?
Evaluate the Business Plan and its ability to incorporate additional financing costs. [Should you not have a Business Plan, be sure to complete one prior to entering into the Factoring agreement.]
Are you confident that you can manage the additional business and challenges this will present?
Did you research your Commercial Finance options thoroughly to make an informed decision?
How it the economic climate? Is it wise to take on the financing?
In today s climate of economy cash flow is King. Your Accounts Receivable Factoring can mean your businesses survival or demise. Review all options prior to your committing to a particular program. The reason there are so many options in the Factoring Industry is because it is not as regulated as the banking industry. Be sure to deal with reputable Factoring Companies ” review documents and fees. Many times, using an Accounts Receivable Factor will lead to you being able to secure bank financing in the future.
Be sure to speak with a Commercial Finance Broker as they will be in the know in regards to what programs are available to you and what will work the best, including bank programs. Just because the bank will not give you financing does not mean you can not get financing. Commercial Brokers have access to lenders for Accounts Receivable Factoring, Export Factoring, Purchase Order Finance and much more.
