You could be an entrepreneur who has just founded your own business. Chances are that your business has no credit history. Or you may already have an established business, and it is on the path of accelerated growth, but you need to increase your business' existing lines of credit. In both the cases you may not get the much needed finance if you go for conventional financing. The lending market is close-fisted these days due to stringent policies and government regulations. In this scenario, getting funds through account receivable financing could easily be your rescue.
According to a recent report by the Washington Post, the financial health of US small businesses is showing signs of improvement during the 1st quarter of 2013. What could be the reason for this improvement? Isn't it confusing when the banks are rejecting most of the loan applications to be in-line with their strict lending policy and over-sensitive approach to credit scores? One apparent reason is the small business' inclination to alternate financing structures such as getting funds through factoring. A/R financing or factoring brings regular cash flow to your business and it makes your Balance Sheet look healthy.
Account receivable financing gives you leverage to sell off your invoices as assets and receive immediate cash. For example, if you have $100,000 in equity, and your company is growing fast, you could have $50,000 in receivables. But this can't get you funds from a traditional lender. Fast growth of your company creates the need for more working capital. During this growth, you keep giving liberal payment terms to your suppliers, and your receivables may outgrow your business' liquid cash. These receivables are not always the good enough to get funds from a bank.
Before you opt for factoring, you may want to think of the following questions:
What is Account Receivable Financing or Factoring?
It's selling multiple (or single) invoices to a factoring company. It is just like selling an asset.
What help can you get from it?
You get instant cash at a high percentage (up to 90%) of the face value of the invoice (s).
What are the other Benefits?
The factoring company takes the responsibility of collecting outstanding receivables once the payment terms complete.
What else you need to know?
The approval of funds is based upon your customer's credit worthiness.
After taking over the invoices, a factoring company validates the invoices from the client's customer (s) and right away pays an advance amount to the client that typically falls between 40% and 90%. The rest is paid as soon as the factoring firm collects the receivables from the customers in due time. During the entire process, the factory company deducts a certain percentage as a discount fee (usually ranges from 2.5% to 7% on a 30 day basis).
The periods of collecting receivables from the customers are usually divided into various "windows" or "time bands" of equal duration. These windows are typically of 15 days, 30 days, 45 days etc. or can be expressed on a daily basis (example 2.5% divided by 30 days)
Now, you can get rid of the constant worries of arranging cash by drudging along to several banks to get immediate cash, which is the lifeline of any business. You can focus on making your business more profitable, and in this process you may have a large number of receivables. But the cash flow into your business will never stop since you can always factor your invoices whenever needed.