If you are a small business owner you will know exactly the struggles of obtaining capital to fund and grow your business that businesses are facing today. With banks limiting lines of credit and loans more businesses are turning to accounts receivable financing. In this article I will try to help you determine if accounts receivable financing, also called factoring, is right for you.
What Exactly Is Accounts Receivable Financing?
Accounts receivable financing is when outstanding invoices or accounts receivables are sold to a finance company. This provides instant cash flow for the business and the risk of collecting the outstanding receivable is transferred to the finance or factoring company. The finance company will pay a discounted amount for the receivables based on the age of the receivables. Accounts that are past due or over 90 days old are typically not accepted by the finance company.
There are three main advantages for companies that sell their receivables to a financing company.
The first advantage is that the collection of the debt is no longer the responsibility of the company. This frees up the company’s resources to focus on other more productive activities. The company also receives a set amount of funds and long longer has to make contingency plans for cash if customer’s fail to pay their debts.
The second advantage for a company is the ability to free up working capital. Assets that are typically tied up in inventory and accounts receivables can be turned into cash more quickly enabling the company to use funds to help grow the business.
The third advantage is that it provides and quick form of financing. You do not need to gather up tax returns and write up a business plan like you may be required to do in order to get a loan.
While there are many advantages for a company that factors its accounts receivables, there are also potential drawbacks that a business should take into account when deciding if factoring is the right choice. The discount fee and other charges incurred may seem high at first but over time these costs may be lower than interest incurrent on a bank loan. You should always shop around to make sure you are paying the lowest possible fees and weigh the costs against the interest a bank would charge you on a loan.
Is Accounts Receivable Funding Right for my Company?
This is a choice obviously only you can make. There are some things to think about before making your decision. Is the money needed immediately for the company to survive or to take advantage of a business opportunity? Is your company ready or have a need for more money and expansion? Have you explored all sources of funding available to a small business?
Take time to carefully consider all your options and investigate any finance companies you may choose to work with. Accounts receivable financing may be the right choice to help a company survive in a competitive environment.