Running a business today can be tough. Aside from keeping your head above waters against the competition, you also have to deal with the issue of having your capital tied up in accounts receivable. Fortunately, you can turn those invoices into cash to help your business meet its day-to-day needs.
The process of selling or using your accounts receivable as collateral to a third party financial company is known as factoring. In this system, you will receive 70 – 95 percent cash equivalent of your accounts receivable as you pass them on to a third party company who will then collect the money owed by your customers for a fee. Account receivable financing is a good idea, especially for a start-up business, because it opens up many opportunities.
By selling your accounts receivable, you can have access to cash immediately. There’s no need for you to wait for weeks or several months just to receive money from your sales. In most cases, funds can be forwarded to your account in five to 10 days, but there are third party companies that will hand you your money within 24 hours.
Retaining Credit Rating
Having your capital replenished means that the credit standing of your company will not be in jeopardy. It can be a huge problem in the future if your business is always late in paying the bills just because your customers are taking their sweet time in delivering payment.
In the U.S., Sutherland reported that the mean past due rate as of May 2013 is 18.29 percent. That means that almost one out of your five clients will not pay on time. By selling your accounts receivable, you can make timely payments to whatever expenses your business might have incurred, ensuring that you have a gleaming record to your service providers.
Forget About Loans
With your money back in your pocket, you have the resources to carry on with operations and serve new clients without asking the bank for a loan. If you are an apparel company, factoring allows you to pay for wages, and other expenses that you may need to cover to continuously serve your customers. You no longer need to acquire a loan from the bank to keep your business moving.
Keep the Business for Yourself
If you are a start-up business, establishing a stable financial flow is crucial if you want to keep your company all to yourself. Unfortunately, some start-ups quickly look for investors to beef up their finances and facilitate growth. Factoring gives you the opportunity to do the same without dishing out a percentage of your business to total strangers just because they have the cash.
Eyes on the Prize
Since capital has been freed up and operations can move forward as usual, your attention is now directed at managing your business instead of trying to collect money from indifferent clients, making you more productive. As you are no longer anxious about receiving payment, you feel calmer in handling operations and addressing the concerns of your employees. As a result, you are putting your business in a good position to succeed.
Having a pile of accounts receivable is not healthy for you business. To get rid of those invoices, opting for account receivable financing is a good idea. It gives you access to quick cash, retains your credit score, prevents loans, keeps investors out, and lets you focus on your business. These excellent advantages more than make up for the small fee involved in the factoring process.