Factoring, Invoice Factoring, Accounts Receivable Factoring, Receivables Factoring, Factoring Account Receivables, and Receivable Factoring all mean the exact same thing. The selling of a company's accounts receivable or invoice(s) at a discount, to a factor, who assumes the credit risk of the account debtors. Essentially it is the sale or assignment of accounts receivable or invoice(s) for immediate cash. This provides businesses from start-ups, mid-size, and large companies access to immediate working capital and provides cash flow for expansion or growth without incurring debt or reducing equity.
Accounts receivable financing is not a loan, so there is no need to make payments or create debt for your business. The major advantage of accounts receivable factoring is that it is easier to obtain than a business loan from a bank. Most factoring companies will approve a business based on the credit worthiness of the companies that are being invoiced and will not require a business's financial statements or any repayment guarantees.
Generally, the business will receive 70%-90% of the invoice amount in 24 to 48 hours after an account is established with a factoring company. When the factoring company receives payment for the invoice, the remaining 10%-30% is paid to the business less a service fee between 1.5% to 3% of the invoice amount per month. The factoring companies' service fees vary based upon monthly volume, industry, and location.
Types of commercial accounts receivable factoring include Invoice Factoring, Purchase Order Financing, Freight Bill Factoring, Construction Factoring, Government Contracts, and Medical Factoring. Industries include manufacturing, service, staffing, distribution, wholesale, communication, pharmaceutical, printing, telecommunication, and transportation companies and many others.
Once a factoring company has purchased invoices the factor becomes a bookkeeping service and collection service for the business that frees up valuable time for the proprietor to concentrate on running the business.
Factoring offers many options which a company can choose to meet its current business needs. Using the services of a factor, a business gains a valuable financial partner who can provide administration, working capital, business expertise, and financial business guidance. With a factor as a partner, a business is able to focus on developing, producing, and selling its products or services.
If cash flow is a problem, then you could turn to banks for a loan. But that would require arranging for collateral. You would only get a fixed amount for a fixed term as a loan and you would still be required to pay interest on that loan. A faster and easier way would be to go in for accounts receivable financing. In this arrangement, an accounts receivable financing company will 'buy' all your credit invoices, i.e. your receivables. They will then pay you either 90% to 95% of the invoice value within 1 to 2 days and the balance less their charges, when they receive the payment from your customer on the due date, or they might just pay you the entire amount of the invoices less their charges.
This will depend on the credit rating of your customers as decided by the financing company, the credit period, which you have provided to your customers and the total volume of business that you will provide your financing company. One instant advantage of this system is that your cash flow will improve overnight. You can now use that money to pay off staff salaries, build up inventory and expand your business. You can now also try to get larger orders, which would not have been possible earlier due to cash constraints.
Another major benefit is that these companies will take over collection of payments from your customers. You can now divert your collection staff to some other department. Your mind will also be free from the daily worries of contacting your customers to ask for payments. The accounts receivable financing company will now handle the entire process. However, care should be taken to ensure that the finance company has courteous and tactful staff to deal with your customers, since it is your reputation on the line.
The finance company will be able to provide you with updated reports on the receivables status of your customers and you can now keep an eye on your receivables without getting involved directly in the collection process. You too, can now concentrate on increasing sales rather than getting tied up in running after collections. The biggest advantage in such a system is that the receivables amount grows along with your business. So, the larger the value of your credit invoices, the larger the amount you will receive within a day or two. The finance company will charge 1.5% to 4% per month on your receivables. So, you should first ensure whether these charges could be absorbed without burning a hole in your pocket. If they can, then this system of finance could be ideal to propel your business to greater heights.
So, crosscheck the charges of the finance company and their quality of service before making up your mind to tie up with any one of them. An accounts receivable financing company can become an extension of your business if you get hold of the right finance company.
Both Carson Nash & Kris Koonar are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Carson Nash has sinced written about articles on various topics from Accounting Guide, Business and Finance. Carson Nash is president and CEO of Carson Nash Funding, Inc. Carson Nash Funding has provided funding sources for Factoring Accounts Receivable for over 21 years. For more information about how Factoring can improve your cash flow and help your business. Carson Nash's top article generates over 590 views. to your Favourites.
Kris Koonar has sinced written about articles on various topics from Site Promotion, Certified Public Accountants and Culture and Society. can help your trucking company grow. Get cash instantly without taking out a loan. To learn more ab. Kris Koonar's top article generates over 550000 views. to your Favourites.