An Overview of Factoring With Accounts Receivable
Getting a fast influx of capital by utilizing your company’s accounts receivable could strengthen your financial outlook. Here are a few key things that you should consider about this funding.
How Does Invoice Factoring Work in Practice?
There are a few different formats of factoring models, but the nuts and bolts are fairly similar throughout the various iterations of this accounts receivable financing. You can sell your receivables to a factoring company in exchange for compensation representing a fixed percentage of their amount. Instead, you could obtain financing in exchange for an agreement to pay a fixed percentage or flat fee after you have received payment on outstanding receivables.
Factoring is most common among businesses that do not require customers to pay for products or services in advance. Many invoicing structures give customers anywhere from thirty to ninety days to tender payment. This is particularly common in business-to-business industries. Ultimately, an invoice that you have just issued but a customer has not paid you yet is exactly what factoring companies are looking for.
What Is Factoring Companies’ Upside?
To make the purchase of receivables worthwhile, businesses have to be willing to settle for compensation that is less than their face value. In general, factoring companies will pay in the range of seventy to ninety percent of an invoice’s value to buy it outright.
Age is a key factor in determining invoices’ worth, and an individual customer’s payment history may also be relevant. In addition, the amount that a factoring company is willing to pay for an interest in accounts receivable may partly depend on whether they are assuming responsibility for collections or responsibility for collections remains with the business from which they have purchased receivables.
How Does Factoring Benefit Small Businesses?
Accounts receivable financing through a factoring enterprise can keep your cash position healthy while you wait on payments from customers. Using the proceeds from a factoring transaction could give you instant cash on hand, allowing you to afford your ongoing operating expenses and investments in new assets to drive growth without overextending yourself.
One of the most appealing benefits of factoring for small businesses is that it can get them capital much more quickly than they would be able to by pursuing traditional small lending programs. Moreover, they can get working capital without having to borrow it from a lending institution they will have to make payments on a recurring basis. Resultantly, their debt-to-asset ratio remains intact, and a transaction will not inflict any damage on their credit score.