Account Receivables Factoring
Financing Your Business with Accounts Receivable Factoring
Article by Marco Terry
Obtaining growth capital has always been a major challenge – and stumbling block – for companies. Many business owners feel that the available options from a bank, basically a business loan or a line of credit, are close to impossible to obtain. Furthermore, most business owners have to go through a loan underwriting cumbersome process that takes weeks only to find out if they qualify. And, more often than not, they don’t qualify because banks have tough requirements and usually demand that the business owner have spotless credit.
However, if you own a business that is selling services or products to good commercial clients, you have an alternative option. And you won’t find it at a bank.
The option is called accounts receivable factoring and it enables you to capitalize on your biggest asset, your invoices from great clients. Factoring provides you with the working capital you need to grow your business and can help you if your biggest challenge is that your customers pay in 30 to 60 days. Factoring provides you with an advance payment, giving you the necessary funds to meet ongoing expenses such as payroll or rent. It eliminates the 60 day wait and gets you paid in as little as 2 days.
As opposed to business loans or lines of credit, accounts receivable factoring is easy to obtain. The biggest requirement is that you do business with clients that are creditworthy and pay reliably. It can work with startups or established companies. Furthermore, accounts receivable financing lines have limits that are tied to your sales. This means that as your sales increase, so does your financing.
Receivables factoring is also fairly easy to use. It works as follows:
1. You deliver goods / services and invoice for them
2. The factoring company buys your invoice and advances you up to 90% (1st installment) of the invoice
3. Once the invoice is paid, the factoring company rebates the remain funds less a small fee (the 2nd installment)
Receivable financing fees vary based on a number of parameters but can range from 1.5% to 3%, making it a very affordable business financing tool. To qualify for accounts receivable factoring, your company must sell goods / services to commercial or government customers and have profit margins of at least 10%.
Is using Accounts Receivable Factoring For You?
So what exactly is accounts receivable factoring?
Well very simply it is the process of obtaining funds by selling your company’s accounts receivable.
To go into a little more detail a company takes the outstanding invoices it is owed and sells them to a third party company called a factor. By doing this the company selling the invoices receives an up front payment on the invoices instead of waiting thirty or more days to be paid. When the invoice does come due the payment is sent to the factor instead of your company. Sounds great right? Well it’s not all roses. If you’re considering going this route you need to be careful. Researching possible factoring companies thoroughly is very important.
Now depending on who you talk to accounts receivable factoring can be a great thing or it can feel like you are borrowing money from a loan shark. Each experience is different and some companies are on the up and up while others you won’t want to touch with a ten foot pole.
So you can better understand the experience we’ll walk you through what happens. Now assuming you’ve got a factor you’re intending to work with we’ll start from the point of the sale. You’ve just finished a large project for a customer. You issue your bill to them. The first thing the factor is going to want to see is someone’s signature that shows they were satisfied with the work. But let’s say you sold them a product that was delivered at the dock. A receiving clerk’s signature is not going to cut it. You are going to need to get the signature of the person that authorized the purchase to begin with. They are going to need to sign the invoice and probably another document that verifies the purchase was legitimate and they plan to pay for it.
Next you are going to need to fax those documents to the factoring company. But you can’t do this from your office because you might have forged those signatures. No they need to be faxed from the customer’s office. And once the factoring company does receive the documents they may still want to call and verify the purchase. Now if the purchase was for a significant amount of money all this hassle may be worth the trouble but what if the purchase was for a few hundred bucks. Not worth the trouble you say? Well we have a problem with that too.
You see when you first sign up with a factoring company they want to know what companies you do business with. And which of those you want to have the invoices factored. This is because those companies that you decide are worth factoring have to be notified that this is going to be the case. And the factor will want to run a credit check on the company. Your customers will also be notified that they must now send their payments to the factoring company instead of you. This task also will be left up to you. The problem is that if you do not factor an invoice the company you are billing must still send its payment to the factoring company and not to you. This will actually cause that particular payment to take longer than necessary to reach you because it will go to the factor first and they have to release it to you.
Once your invoice has been submitted to the factor from your customer’s location you need to check and make sure it was actually received and there are no problems with it. After the factor receives the invoice it should only take about twenty-four hours to be approved. Most factors have a cut off time each day to receive an invoice if you want to receive your money the next day.
After the factoring company has approved the invoice you will receive a wire transfer to your bank. From there the money is yours to do as you will. Many factoring companies want you to believe that using accounts receivable factoring is the perfect way to get the money you need to grow your business. The truth is that it is not suitable for many types of businesses. Your billing methods need to be very straight forward to help make factoring work. And it helps if you issue fewer invoices but for large amounts of money. Otherwise having to do all the leg work can take you away from what really matters.
Accounts receivable factoring lets you focus on your core business competencies.
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Using Accounts Receivable Factoring to Fund Your Company
Finding the right business financing solution for a company can be a major challenge, even for seasoned professionals. Each financing solution has benefits and drawbacks and knowing which solution to deploy is critical. Deploying the wrong solution can have long term negative consequences for your company, dragging down growth.
One specific challenge stems from selling products and services to other companies on net 30 terms. This can be a problem because most companies incur a number of expenses before delivering their product or services. Waiting an additional 30 to 60 days to get paid increases the gap between spending funds and receiving revenue. This forces the company to dip into reserves to pay for operations. There is no problem with this strategy as long as the company has sufficient reserves. However, the company can get into problems very quickly if the reserves are exhausted. Interestingly, this can happen from a seemingly positive event, such as winning a large sale or project.
There is a specific business financing solution for this type of problem. It’s called accounts receivable factoring and it works by providing your company with a quick payment on your net 30 to net 60 invoices. The quick payment reduces, or eliminates, the gap between expenses and revenues. This puts your company on a solid financial footing, providing a platform for sales growth.
Qualifying for receivables factoring is usually easier than qualifying for a small business loan. Most factoring companies are more interested in the quality of your receivables than anything else since that is the collateral that secures their transaction. Thanks to this approach, small and medium sized companies with few assets other than a strong list of clients can usually qualify.
Accounts receivable factoring integrates fairly easily into most companies and works as follows. Once your company completes the work, you send a copy of the invoice to the factoring company. The factoring company gives you the first advance on the invoice which is about 80% of the face value. Once your client actually pays the invoice, the factoring company remits the second advance, which is the remaining 20% less the financing fee.
This type of financing lends itself well to certain industries. For example, staffing, security and transportation companies commonly factor receivables as a way to ensure they have funds to meet operational expenses.
Invoice factoring has been gaining popularity as an alternative to conventional business loans, especially for startup, growing and distressed companies.
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When you can use accounts receivable financing?
There are many people that think why to go for selling the receivables when they can actually collect entire amount that is outstanding as well as get rid of taking debt as well as inviting financial charges attached to it. The very good answer for all of them can be time is very precious and it is also said that time is money. In case the business does not have free cash the business might have to face serious problems for repaying the obligations to its creditors, employees as well as in making income. Therefore a very good option for this can be accounts receivable financing. There are many advantages that you can get from accounts receivable.
There are many times when collecting debt requires professional efforts for debt collection mainly at the time when debtor is troubling you a lot in paying. The fact remains that the efforts as well as time that will be required in making the debtor to repay the amount may be high as compare to that of the amount the business is actually making an effort to collect. In this case one of the very good option for you to go with the accounts receivable financing company and get them to deal with the debtors. However one thing of which you need to be careful about is that this can really destroy the relationship with the consumer and so you need to be careful. The main reason behind this is that majority of the debtors are of the opinion that the outstanding amount is the matter that should be kept between you and them. In case it is passed on to the third party it might not be liked by them and so you need to be careful. However in case you are really finding difficulty in collecting debts you can go for these companies.
It is one of the very fast ways of financing of which you can take the advantage of. When you need money you will not have to gather tax returns as well as business plans which are actually required at the time of taking the loan. Therefore when you opt for the accounts receivable financing you will not be wasting time and efforts rather get cash instantly and can concentrate in increasing the productivity of the business. When you want all this taking up accounts receivable financing would be good idea.
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Accounts Receivable Financing- Great Ways to Increase Profits
For small and medium businesses or those which are in their growing stages, to obtain finances is a very tough task. Bank loans are not easily provided to such organizations as they take into consideration factors like number of years in business, assets and other factors. Moreover getting a loan is a time consuming process. In situations, where organizations have customers who pay in a period of 30 to 60 days or more, managing funds becomes difficult. They may miss out on an opportunity to attain new business merely due to lack of funds. This in turn leads to financial losses, as well as further opportunities to grow.
Additionally, regular expenses like rents, wages etc., which are unavoidable, need to be taken care of. So money gets help up because of the slow paying customers. In such a scenario, can a business deliver the larger orders of larger customers and provide them larger credits for 60-90 days? The solution for this lies in accounts receivable financing. Accounts receivable financing provides you with immediate cash against collateral of your accounts receivables. The only criterion here is that your customers must be credit worthy. Some companies would even provide you with finance even if you do not have hard collateral but have good invoices, with good profit margins and a great business plan.
Accounts receivable finance allows a great way to increase profits. Initially you may feel what is left for you if you are earning 5% profits and are paying around 4% to the finance company? However, because of finances being available at the right time, you will not miss an opportunity to get bigger contracts. Improved business, leads to higher profit margins and thus an overall increase in profits. Cost of production is reduced in case of higher volumes, though there may be slight rise in certain fixed costs like electricity bills, wages and insurance, which may very slightly affect overall profits.
Moreover as your business grows you have more invoices which you can use as collateral to avail loans from such accounts receivable financing companies. When you take a loan from the bank it is a one time thing, as compared to the accounts receivable financing where you have continuous loans of amounts as and when you require them. At the end of the year you have no debt left.
When you use the accounts receivable financing you assume that the customer would take the stipulated period of 30-60 days to pay the bill. However if the customer pays later than that, then when you are applying for finance you can see to it that the invoice is 30 days old or so, so that you pay fees for 30 days only. Another thing you may do is use the faster paying customers first for your urgent cash needs. As the responsibility of collecting the invoices is upon you, it often leads to bringing about more discipline in business management. With the financing companies guidance you may also put your finances in order and choose those customers who have good credit ratings or get government contracts.
Accounts receivable financing thus helps increase profits which is a major factor in the growth of any business.
Why All Businesses Require Accounts Receivable Factoring and Factoring Services?
By using accounts receivable factoring and factoring services, you can have greater control of your own businesses as well as have greater amount of liquid capital to invest in your businesses in the present moment. Thus, you’ll be able to reach your goals sooner than later.
As you know, accounts receivable factoring and factoring services offers you the flexibility and access to financial capital in ways you can’t get at any typical bank.
The top 5 advantages/benefits of using accounts receivable factoring & factoring services as a viable financing option while performing daily business activities are as follows:
1) Your company’s equity isn’t tied up or locked up:
With accounts receivable factoring you are not taking a loan or adding any liability to your businesses. There are banks which offer capital on the basis of mortgaging your businesses assets which locks them up and you can’t even use them while performing your daily business activities. factoring services usually frees the assets.
2) Your businesses have their options expanded as cashflow increases:
With accounts receivable factoring you are actively able to take on growth opportunities as and when they appear. You can even take advantage of cash discounts, perform opportunistic based advertising, expand your staff, purchase different types of inventory & expand the available infrastructure, all while comfortably paying insurance, rent, taxes, meeting payroll & equipment payments, and keeping all your suppliers happy by paying their bills on time.
3) You can keep your clients happy:
Accounts receivable factoring allows you to offer your customers to enjoy a certain credit limit and special credit terms for a specific period while your cash flow remains unaffected. This way you make the terms of doing business simpler than ever and they’ll be more than happy to reward you with more orders on a consistent basis.
4) You can have greater control and say over your business matters without any external interference while making business decisions:
Factoring services helps you to avoid partnerships with venture capitalists who usually interfere in each and every business decision. However, since it is your business only you must have the final say over how your business must be done. accounts receivable factoring and factoring services helps you to avoid equity sharing partnerships with venture capitalists which you may need in order to keep your business afloat.
5) You are debt-free:
By using facilities like factoring services and accounts receivable factoring, you remain debt-free with zero liabilities. Therefore, your balance sheet sounds a lot stronger and healthier which results in expansion of your payment capabilities. Your credit report will now be a lot healthier and you can negotiate other forms of financing from an advanced position of greater power, flexibility and credibility.
Accounts receivable factoring and factoring services are the new trends in terms of business financing as they are safer to deal with, easier to get and makes an entrepreneur become debt-free. It thus helps in preserving assets, builds trustworthy relationships with clients, offers variety of options and lets a business run smoothly without any hiccups or hurdles. accounts receivable factoring and factoring services is an important business practice every business must undertake to grow really fast.
A Description and History of Accounts Receivable Financing Loans
An accounts receivable financing loan is exactly what it sounds like. Your business can take out a loan against money that is owed to you, so it’s essentially borrowing from yourself. When you need money quickly, it could be that untried option that you’ll actually get approved for. If you find the right bank or lending institution, you might even be able to negotiate reasonable short term repayment and get an affordable interest rate. Some banks right now are offering less than 2% for loans of up to thirty days. That extra month can be a huge boost if you’ve just made a large sale of existing inventory and need cash to purchase additional inventory while you’re waiting for payment on the last sale.
The difference between an accounts receivable financing loan and more traditional loans is that banks look at the credit score and payment history of those who owe you money instead of your own history. For those with bad credit or companies just starting out, it may be advantageous to have the bank look at the customers you’re invoicing instead of you when you’re attempting to get your hands on some working capital financing. Traditional loans are always hard to come by, especially in this economic climate, unless you happen to have stellar credit or lots of collateral.
What is Factoring?
One of the oldest financial practices for merchants having difficulty making ends meet is the sale of accounts receivable for a percentage of what they are worth. This process is known as factoring, because when you sell your accounts receivable, you sell them to a factor. The practice is very common in the debt collection business. That’s why you often hear from multiple collection agencies on the same debt. The first one will attempt collection and then sell it to another agency, one that is actually a factor, for a percentage of the paid value of the debt. They then use the cash to expand their business or purchase debt from other agencies.
Your bank may not offer to buy your account receivables outright, since they’re not in the business of purchasing debt, but there are a number of agencies and online sites where you can find someone to take those unpaid invoices off your hands. What you want to do when shopping for this type of loan is to seek out the highest percentage of debt that factors are willing to offer. They won’t pay dollar for dollar, so don’t waste your time asking, but some will give eighty or ninety cents per dollar if they can see a strong likelihood of receiving prompt payment.
History of Factoring and Accounts Receivable Financing
The practice of buying someone’s debt in return for cash goes back to pre-colonial England, when merchants would sell their invoices in return for cash to pay workers and finance trade ventures. Since many of these merchants ran small operations, the credit worthiness of their buyers was evaluated before the money was given. Just as it is today with smaller companies selling goods and services to larger, more credit worthy companies, back then the merchant himself couldn’t get financing unless he had firm commitments from larger distributors and retailers. This early form of accounts receivable financing loan laid the groundwork for what would become an invaluable source of financing in the late 19th and early 20th Century.
After the Civil War in the United States, new markets opened up with the development of what was at the time considered advanced technology. The invention of the cotton gin in 1793 had actually given merchants the tool they needed to mass produce textiles, but transportation methods were still primitive. By the 1870′s, steam engines and iron clad ships were making the world a smaller place and telegraph lines made communication much simpler. The industrial revolution began and once again small companies and independent merchants were selling goods and services to larger manufacturers and textile mills. Factors became popular again and banks began to issue their own version of accounts receivable loans.
Who are the Best Candidates for AR Financing Loans?
The small company with little or no credit selling to the large corporation with an established payment history is the best candidate for this type of loan. As more and more people are using the internet to strike out on their own, the banks see an increase in the number of applicants for this type of funding. Think of the independent programmer designing apps for iPhones or Blackberries. The company buying those apps will probably take a while to make payment for them, but their invoice is considered as good as cash by a financial institution because they have top-of-the-line credit. Take out a thirty day loan against those invoices and you’re looking at an interest rate of as little as .69% in some cases and a maximum of 1.59%.
Economic Roadblocks and Reasonable Alternatives
When the nation or the world is experiencing a period of rapid growth and a growing economy, the banks are more likely to lend money using the accounts payable financing loan option. With the situation being what it is today, you’ll have to show growth within your industry and present invoices that are going to established companies in no danger of going under. Many of the big players in the retail industry, once considered untouchable, have gone out of business in the last few years, victims of over-leveraging during a brutal recession. Banks and other lenders took a hit when those companies defaulted and they are being more cautious now as a result.
That is not to say that getting a loan is impossible. Look for short term schedules and ask for smaller amounts when you first start seeking this type of financing. If you have clients or customers who have been established for a while, present their invoices to the bank. They count as collateral. If your clients are relatively obscure and have little or no credit worthiness, try using your credit card sales numbers and ask for a merchant account cash advance. You might have better luck with one of those.
What Makes You Qualify For Accounts Receivable Financing
There are often situations when small, medium and even large companies find themselves in a tough spot as far as revenues are concerned. They are at a loss of funds or finance to undertake a project that is expected to give good results. In such a scenario the option available for financing is accounts receivable financing.
Accounts receivable financing is a secured loan for which accounts receivables are pledged as collateral with financial organizations. For small businesses it acts as a boon to help improve their cash flow. Generally small businesses find it hard to receive finance from a bank as they have less credit rating to show because they are yet in a developing stage. Unless finance is available, it is not possible for business to grow at a good pace. A timely finance from finance companies or even banks proves to be helpful for their growth. They often have customers who do not pay before 30-60 days. In such cases the accounts receivable are given as security to a financial organization and finance is received.
Any company can opt for accounts receivable finance. It is very popular with transport or trucking companies, construction companies, manufacturing companies, textiles, staffing and engineering and other small businesses. It benefits medium business and any other business that needs finance on a daily basis. These companies would need to have accounts receivable in hand. The companies who can qualify for such finances would need to have accounts receivables from credit worthy customers.
Moreover, aging of accounts happen to very large extent. They may have regular contracts with organizations with good credit history or government organizations. Some financial organizations also consider the period for which the credit is given, which they prefer should be within 30- 60 days. Companies which are experiencing modest speed of growth and find it hard to keep the cash flow constant find the accounts receivable finance very beneficial.
These finances ensure growth and stability of a company. The process is very quick and you can get the finance in a very short period of time. As finances are available on a timely basis, the companies may be able to get some advantage of reduction of overheads. The processing time of this type of financing is very less. Some of the companies also have online submission, and invoice submission systems which are then verified and checked and finance is provide in less than 2 days also which is a very timely help for these companies which need finance to undertake their daily activities. One more benefit that you get from such a finance function is that the accounts of the companies are managed better as proper records and collection on the due date is very important. For the small companies it is an additional benefit that the business in itself is well organized to make the entire process cost effective.
Accounts receivable financing is available to all those organizations that are in urgent need of finance or cash and are caught up in tricky situations wherein customers make payments very late. Companies find this financing highly beneficial to keep the growth of their organization on track.
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Accounts Receivable Financing, Tax Write Off And What Does It Cost?
Article by Cassandra Ingraham
Banks won’t lend money to a business seeking to acquire larger contracts because its not viewed as an asset. So if you are a small start up company, funding for expansion may be hard to obtain. Accounts Receivable Financing could be the key to funding for a start up with desires to bid on large Government (or Corporate) contracts.
So what is Accounts Receivable Financing? It is the selling of your accounts receivable invoices for cash versus waiting 30-60 or 90 days to be paid by your customer. Accounts Receivable Financing is also know as Factoring.
Securing the services of an Accounts Receivable Financing Company will allow a small company to bid on almost any contract within reason. A small company would know in advance that the funds needed to produce goods or provide services are available once they win the contract. In fact, some A/R Companies will advise you on which companies they will Factor Invoices from and which to avoid! (Federal Government contracts are considered “gold” however not all Factoring companies can handle Government Receivables)
One of the major concerns for most small business owners is how much does Accounts Receivable Financing cost? Between 1 to 5% generally speaking. Since Accounts Receivable Financing rates depend on the credit-worthiness of your customers, your average invoice, average payment cycle, and factoring volume, its hard to predetermine the exact cost of the money. However, you should remember, whatever the cost is: Its TAX DEDUCTIBLE and this is important. This means that the cost to factor is offset by IRS.
Not all Factoring companies are created equally (you can’t tell that by looking at their web pages). A Cash Flow Consultant or an Accounts Receivable Broker can stir you in the right direction. There are issues such as: process to acquire funding, will the Accounts Receivable Financial company (factoring) company handle your collections, will they provide the funds through a credit card or will they wire the monies into your business checking account, will the Accounts Receivable Financial company factor with recourse or without recourse? (Meaning will they take responsibility for the debt or will you the client take ultimate responsibility? The rates are different)
Sometimes an A/R Broker has a choice, but not all the time. For instances, there are not that many companies that provide Accounts Receivable Financing for health care or construction. It all depends on what type of business you have and what your needs are.
About the Author
Cassandra Ingraham a Tax Accountant and Accounts Receivable Broker who specializes in Government and Corporate Contract Receivables. For more information, go to: http://taxeswilltravel.com/Cash%20Flow%20Loans.htm
Waypoint Capital Corp – Calgary
Waypoint Capital Corp www.yellowpages.ca WayPoint Capital Corporation solves cash flow challenges for growing businesses. We coordinate capital infusion and use financial tools to help successful companies take advantage of business opportunities and pay current obligations.
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