Setting up an account receivable factoring relationship is quick and easy in comparison to other forms of financing. Applications simply call for basic company information and a customer list. Years of profitability are not required which makes factoring an option for startups generating receivables. It is possible that funding can occur in as little as a couple of days after the receipt of the application and invoices.
People consider the accounts receivable analysis
discount a small cost of doing accounts receivable outsourcing business. A four-percent accounting accounts receivable discount for a 30-day invoice is common. Compared with the problem of not having cash when you need it to operate, the accounts receivable manager
four-percent discount is negligible. Look at the factor's collecting accounts receivable discount as though your business had offered the customer a account receivable factoring discount for paying cash. It works out the same.
Companies consider the managing accounts receivable discount the same way they treat a sales price: It is simply the cost of generating cash flow, much like collecting accounts receivable discounting merchandise is the cost of generating sales.
Accounts receivable purchasing is a cash flow tool used by a variety of businesses, not just those who are small or struggling. Many commercial accounts receivable
companies factor to reduce the overhead of their own accounts receivable program
accounting department. Others use accounts receivable specialist
to generate cash, which can be used to expand marketing efforts and increase production.
Why Factoring accounts receivable policies
Appeals to the Start-Up
Factoring accounts receivable procedure is especially appealing to young and rapidly growing companies. Since the accounts receivable process shortens their business cycle, these businesses can grow faster. The ability to make more products to sell while waiting for invoices to be paid is largely eliminated. Such businesses usually net much more profit with factoring accounts receivable solutions than without, even when the discount is considered.
Factoring accounts receivable system vs. Bank Loans
business accounts receivable has been around for thousands of years. Factors are accounts receivable loan investors who pay cash for the right to receive the future payments on your aaccounts receivable finance invoices.
An unpaid accounts receivable lending receivable or invoice has value. It is a small business loan debt your customer has agreed to pay in the near future.
Factoring accounts receivable software Principals
Although factor accounts receivable deals exclusively with business-to-business transactions for small business loans, a large percentage of the accounts receivable factoring company retail business uses a factoring principal. MasterCard, Visa, and American Express all use a form of new small business loan factoring in their retail transactions. Using the purest definition of the word, these large government small business loans consumer finance companies are really just large factors of consumer paper.
Think about it: You make a purchase at Sears and charge it to your MasterCard. The store gets paid almost immediately, even though you do not make payment until you are ready. For this accounts receivable funding service, the credit card company charges Sears a fee (typical fees range from two to four percent of the sale).
Factor accounts receivable can offer many benefits to cash-hungry companies. Rather than wait 30, 60, 90 accounts receivable turnover days or longer for payment on a product or service that has already been delivered, a business can factor (sell) its receivables for cash at a small discount off the amount of the invoice.
Payroll, marketing efforts, and working capital are just a few of the business needs that can be met with this instant cash.
Accounts receivable funding provides the means for a manufacturer to replenish inventory and make more products to sell: There is no longer a need to wait for earlier accounts receivable turnoversales to be paid. accounts receivable collections is not just a cash management tool for manufacturers: Almost any type of business can benefit from accounts receivable aging.
Generally, a business that extends accounts receivable insurance credit will have 10 to 20 percent of its annual sales tied up in accounts receivable at any given time. Think for a moment about how much money is tied up in 60 days’ worth of invoices: You cannot pay the power bill or this week's payroll with a customer's invoice, but you can sell that invoice for the cash to meet those obligations.
Accounts receivable factors is a fast and easy process. The factor buys the invoice at a accounts receivable collection discount, usually a few percentage points less than the face value of the accounts receivable days invoice.
The accounts receivable collection Drawbacks
How to Increase Cash Flow Without Borrowing
Cash flow is one of the main reasons businesses fail. At one time or another, every business, even successful ones, have experienced poor cash flow. Cash flow does not have to be a problem any more. Do not be fooled -- small business loans are not the only places you can get funding. Other small business loan bad credit solutions are available and you do not have to borrow.
What is accounts receivable financing?
One solution is called factoring. Accounts receivable factoring company is the process of selling accounts receivable to an investor rather than waiting to collect the money from the account receivable financing customer.
Oh, the small business loan Irony…
accounts receivable loans has an ironic distinction: It is the financial backbone of many of America's most successful businesses. Why is this government small business loans ironic? Because factoring accounts receivable is not taught in business colleges, is seldom mentioned in business plans and is relatively unknown to the majority of American business people. Yet it is a financial process that frees up billions of accounts receivable dollars every year, enabling thousands of businesses to grow and prosper.
So, why not simply go over to the friendly small business financing banker for a small business finance loan to alleviate cash flow problems? A small business cash loan can be difficult if not impossible to receive, especially for a young, high-growth operation, because small business money bankers are not expected to decrease lending restrictions soon. The relationships between businesses and their small business credit bankers are not as strong or as dependable as they used to be.
The impact of a small
loan is much different than that of the factoring process on a business. A small business lending loan places a debt on your business balance sheet, which costs you interest. By contrast, factoring puts money in the small business bank without the creation of any obligation. Frequently, the factoring discount will be less than the current small business finances loan interest rate.
Small business credit lines Loans are largely dependent on the borrower's financial soundness, whereas factoring is more interested in the soundness of the client's customers and not the client's business itself. This is a real plus for new businesses without established small business growth track records.
There are many situations where factoring loans to small business can help a business meet its cash flow needs. It provides a continuing source of operating capital without incurring debt, which can result in growth opportunities that dramatically increase the bottom line. Virtually any business can benefit from factoring as part of its overall operating philosophy.
Every good businessperson must understand the concept and benefits of factoring in order to operate as profitably as possible. The following chart can help you understand the differences between factoring and other sources of funding.
1. How can your small business banking services help my business?
“What would you do if you had access to cash immediately instead of having to wait 30, 60, 90 days, or longer to receive payments from your customers?”
“Did your bank reject your small
loan application or require you to pledge additional collateral that you did not have?”.
“Have you ever missed out on a significant growth opportunity because your cash flow is slow?”
If the Answer is YES to any of these questions, “Well then, I think small business factoring is a good option for your small business
2. What is sba small business factoring?
In a nutshell, invoice factoring consists of converting a company’s accounts receivable into cash by selling invoices to a factor at a discount. Factoring is a valuable credit for small business financing option for companies who are just starting out or who are experiencing a period of rapid growth. Because invoice factoring companies rely on being paid by your customers, your own financial history does not have any bearing on your qualification. Most importantly, factoring allows your company to stop worrying about small business credit reports cash flow and start focusing on what really matters in a business — operating it.
3. What does all of this loan
small business administration
Eight fundamental terms to you understand the factoring process better.
• Account creditor: another name for the client
• Account debtor: another name for the clients’ customers; the entity that the factor collects from
• Accounts receivable: money received or owed to the client
• Accounts payable: money the client pays out or owes
• Advance rate: the percentage of money that a factor advances its clients upon the sale of its invoices
• small business lender Discount fee: a fee that the factor charges when purchasing an invoice
• Reserve: the percent advanced, less the small business startup
factor’s discount fee
4. OK, I understand the concept of factoring, but how does it work?
Factoring business financing
is a way to fill the gap between when a company invoices its customers and when it receives payment for its services. Describing the factoring process can easily be accomplished by referring to a diagram, like the one below, or by describing a short series of steps:
• The customer requests goods/services from ABC Company.
• ABC Company delivers the goods/performs the services.
• ABC Company issues an invoice to their customer, and then the invoice is sold to a financing for business factor.
• Upon verification of invoice, the business finance factor advances cash on the sold invoice.
• ABC Company’s customer pays the business receivable factoring
• Upon receipt of payment, the new
factor will release the difference (reserve) between the collected amount and the advance, minus the factoring business discount fee.
5. What’s in it for me?
• Immediate access to cash upon the sale of valid invoices
• No liability on the company’s balance sheet
• Ability to eliminate unnecessary overhead
• Leverage off of the company’s customers’ credit
• Early payment discounts
• Build the business credit
6. But what will my customers think if I start doing business with a loan
Although this is a common concern for many companies who are considering receivable financing it need not be.
A lot of your customers may already be familiar with receivables financing
. Ar financing is one of the oldest methods of providing factoring financing working capital to help businesses solve their financing growth cash flow needs. In fact, credit card business loans transactions are the most common form of business loan factoring used today. Some of the largest corporations in the world benefit from unsecured business loans factoring millions of dollars of their accounts receivable every year.
Your customers will most likely view the unsecured business loan factoring relationship positively because it demonstrates that the company’s business loan terms finances are secure enough to establish a line of credit. Working with a factor term business loans delivers an important message to your customers — that the po financing business is solid, rapidly growing, and in high demand.
Finally, when a company establishes an active relationship with a fast
factor, all parties benefit. Your customers can continue to receive the business’ goods/services, and they can do it while waiting 30, 60, 90 days, or longer to pay. In the meantime, you get the benefits of having short term business loan money today, therefore permitting a healthy acquisition financing business relationship on both ends
Whether you are a machinist operating out of a garage or a staffing company placing hundreds of workers in the largest Northwest firms, you undoubtedly face cash flow dilemmas from time to time. The uncomfortable ritual of making incoming cash receipts stretch to cover short term obligations frustrates even the most seasoned business managers.
In recent years, an increasing number of businesses have discovered that credit factoring can combat the ups and downs of unpredictable cash flow cycles. More importantly, credit factoring factors are providing the small business community with a viable source of working capital when conventional financing is not always an option.
Currently, $62 billion dollars in invoices are factored in the United States each year.
In the last 10 years, according to Research Group in Newton, Massachusetts, the volume of invoices factored has increased by $10 billion dollars.
Historically, the bulk of receivables
was predominately in the textile, furniture and apparel industries. Today, factoring firms are working with all types of industries, including: manufacturers, service providers, transportation companies and high technology firms. Locally, as growing Puget Sound firms continue to prosper, suppliers and contractors are looking for additional sources of working capital to accommodate increased sales volume.
The overall increase in factoring volume is mainly attributed to the credit crunch in the late 80s. As the availability of bank commercial credit tightens, more businesses look towards alternative sources of financing to achieve growth.
Factors can help those firms that banks often find difficult to approve such as start-up companies whose growth outstrips cash. The primary focus in a factoring relationship is the credit-worthiness of the customers being invoiced and the client’s ability to produce a quality product or service. Simply put, if the business has an acceptable product or service that it provides to a creditworthy customer then the business is a candidate for factoring.
The fact is that most companies share a common dilemma during periods of rapid growth of incoming orders draining cash flow. Factoring not only provides immediate cash but, efficient businesses also use it as a tool to increase profit margins:
1. Take Advantage of Early Payment Discounts - Having access to cash enables businesses to save on average 2% by taking advantage of early payment terms offered by suppliers. The points saved by reducing raw materials costs helps to offset the factoring fee.
2. Take Advantage of Volume Discounts - Having cash also enables businesses to buy raw materials in greater volume. This saves money and directly impacts the bottom line.
3. Reduce Late Payment Penalties and Interest Charges - Having immediate cash on hand to pay current obligations as they become due eliminates late charges from suppliers and other creditors.
4. Meet Obligations on Time - Paying vendors on time helps to establish a solid credit track record and allows for increased future credit limits from vendors as well as financial institutions.
5. Offer Credit Terms to Customers - Offering credit terms to customers is a common way to increase sales by making it “easier” for customers to buy. Having financial backing to carry accounts receivable is essential if a business wants to be able to follow through on its commitments. Reputable factors encourage “managed” growth by consulting with clients regarding exposures and other risks when taking on new credit accounts.
The difference between factoring and other sources of financing is that the factor actually purchases and tracks commercial invoices. In addition to providing immediate cash on invoices, the factor performs valuable credit analysis on new and existing customers and conducts professional, routine follow up on invoices as they become due.
Each factor operates slightly different. It is important to understand which programs provide the greatest benefits and at the least cost. Several criteria should be addressed when searching for a reputable factor. Are there setup fees, maintenance fees or penalty fees? Is there a long term contract? Are there monthly minimums? Does the factor provide credit and collection services at no additional charge? What accounting reports will the factor supply? What value-added services does it provide?
There are approximately fifteen factoring companies in the Puget Sound area who service accounts locally. Most business bankers are a good referral source for reputable factoring companies. Bankers refer to factors because they realize that although the customer may not be bankable at the time of the referral, in a short time it could be a viable candidate for conventional financing. As a short term financing solution, factoring relationships generally run from 6 months to a couple of years.
Businesses choosing to maintain momentum, despite a lack of conventional financing options, find that factoring not only offers cash but also a stable foundation on which to build. They look to a future of managed growth and profitable performance that will bridge the gap to qualifying for bank financing.
For the business manager who spends a good portion of the day collecting, bookkeeping and searching for capital, the entire factoring package offers peace of mind. The manager can actually focus on important aspects of the business that are often pushed aside, such as marketing and production.
Depending on the agreement, businesses can pick and choose which invoices they wish to sell to the factor, who immediately advances eighty percent or more of the face value of the invoices. The balance of the funds, less the discount fee, is released once the invoice is collected.
The cost of doing business with a factoring company is the discount taken on the invoices submitted for funding. Fees range from 3 to 9 percent, depending on volume, credit-worthiness of the customers sold and overall risk. The discount taken is best compared to a merchant accepting a Visa or MasterCard transaction and receiving immediate payment, less a percentage or discount, before the actual cardholder has paid his or her monthly statement.
Offering account receivable factoring in the following states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho State, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.