Signs Factoring Accounts Receivable Can Help Your Business

Can factoring accounts receivables help grow your business?

That’s a very good question. Most small businesses invariably need more money than what their owners have in reserve. They need to pay their staff, buy supplies, get tools and equipment, cover rent and utilities, and spend money on marketing and advertising.

If this situation applies to your own business, perhaps you’re thinking that a bank loan is in order, or you may even be contemplating using your own credit card to fund your business operations.

But you are not limited to these options. You can also consider factoring receivable. Here are some signs indicating that factoring may be an ideal solution for your needs:

  1. You don’t want to go into more debt. There are many reasons why you don’t want your business to incur any more debt than it already has. Perhaps you now owe a ton of money to the bank or to your friends and family. Adding more debt on top of those obligations may be more than what you can handle.

But with factoring, you don’t have to take out a loan at all. You get an advance of the money owed to you by your customers, and that’s a different thing altogether.

  1. You can’t get a loan. Maybe you already applied for a loan and your application got rejected. There are many possible reasons for this. Perhaps your company is new, and the bank is not convinced you’d be able to pay back their money. Or you have bad credit, which makes you a poor candidate for a loan.

For whatever reason, factoring may be a more viable alternative, since it’s much easier to get. Most factoring companies don’t really care about your credit.

  1. Your give credit terms to your customers. It can be very frustrating when you can’t have the money needed for your business expenditures, because your customers have not paid you in full. Perhaps your agreement with your customers allow them 30 to 60 days to pay for their purchases, in which case you’ll have to wait a long time before you get your money.

If you can’t wait, then factoring becomes a suitable solution. The point of factoring is to get you that money in advance, so that you don’t have to wait at all.

  1. Your customers have good credit and payment histories. This is the most important consideration for factors. If your customers have a very credit history then you’re likely to get your factoring application approved. Also, you may only have to pay a smaller fee than if your customers have spotty payment records.

If any of these apply to your business, then it’s probably time to consider factoring accounts receivables to get the working capital you need. You’re more likely to get financing, and you can use that money to help your business grow.

Factoring Accounts Receivable: How It Works

In most cases, a business that needs an infusion of cash right away to help them get through a difficult time or to foster expansion will go to a bank for a loan. But if your customers are businesses as well, then you may want to think about factoring your accounts receivable instead.

Here is how it works:

  • The purpose of this financing option is to free up your cash flow instead of having the money tied up in your accounts receivable. This method essentially “sells” your ARs to the factoring company, instead of getting a loan.
  • Initially, the factor’s main concern is that your customers are creditworthy so that they know the invoices you issue will be paid in full on or before the due date. The factor’s research can be very helpful in helping you identify which among your customers can be trusted to pay promptly.
  • Once your factoring set up has been finalized, you can send the factor a copy of the invoice. Usually, this invoice will specify the amount owed by the customer and also when the payment is due, usually in 30 days or 60 days.
  • Instead of having to wait for that money, you can get a sizable percentage of the money immediately. It all depends on your agreement with the factor, but on average you can get about 80% of the value of the account receivable upfront.
  • The remaining 20% will be sent to you once the customer pays in full. The factor takes over the management of your accounts receivable, and they do the collecting as well. The customer pays the factor directly, and then they pass on the rest of the payment to you after they have taken their fees.
  • You can then use this money for any of the most pressing needs of your company. You can pay the salaries of your workers, cover the operating costs, pay your supplies, or improve your business by doing renovations or buying new equipment. Factors usually don’t care what you do with the cash advance, unlike banks who want to know what you wish to do with the loan proceeds.
  • The factor doesn’t just advance you the money against the accounts receivable. They process your receivable as well. Essentially, it’s as if you are outsourcing your accounts receivable processing and collecting to a third party.
  • In some situations, all accounts receivable may be part of the factoring arrangement. But it may also be possible to only choose certain invoices for factoring.

As you can see, it really is very simple. Factoring your accounts receivable is a much faster process and much more likely to get approved than getting a bank loan. And getting the funding you need does not affect your current credit, nor are you required to put up your personal assets as collateral.