What is Receivables Factoring?
The short answer is that accounts receivable factoring is a financing tool that is used by companies that have slow paying invoices and need an advance on their receivables.
Does your company have slow paying invoices?
Most commercial sales to corporate or government clients are usually done on payment terms. Clients, especially large corporations, usually negotiate payment agreements into their contracts which allow them to pay an invoice in up to 60 days. This can create a financial problem for entrepreneurs who run small companies and don't have the financial resources to wait. This problem is common for small companies and for companies that are growing too quickly.
If this happens to you, you may need to delay payments to your suppliers for a few days, or even weeks. In its worse cases, you may not be able to pay employees on time or you may need to decline new client sales. This is clearly a bad situation and if it's left unmanaged, it will tend to grow and get worse.
One solution - Factor your receivables
One effective way to solve this problem is to finance your receivables. Instead of waiting for your client to pay you slowly, you can fund your receivables through a factoring financing company. This provides your business with immediate working capital that can be used to cover existing expenses, or used to cover new sales.
Using accounts receivable factoring can provide two important benefits to your company. Your company will enjoy more stability as your cash flow will become more predictable. But more importantly, you can use your accounts receivable financing line to grow your business by offering terms to qualified clients who demand it. Because if you need funds to cover expenses, you can also finance the invoice.
Here is a sample transaction
Most transaction follow a common structure where receivables are financed in two payments. The first payment, provided as soon as your client accepts your invoice, is called the advance. It covers about 85% of your invoice's gross value. The second payment, called the rebate, is wired to your company as soon as your customer pays the invoice in full. This covers the remaining 15%, less any costs. In summary:
- You deliver goods/services to your customer and issue an invoice
- The factoring company advances 85% to you (this varies)
- Your client pays in 30 to 60 days
- The finance company rebates the remaining 15%, less costs
What about cost?
The cost of accounts receivable factoring vary by company and industry. Usually they are determined by the size of your invoices, the quality of your portfolio and your business track record. In general, costs range from 1.5% to 3% per 30 days, though these vary. In general, this solution works best for companies that have high profit margins and who have customers that pat their invoices in less than eight weeks. Here are some useful tips to negotiate factoring rates.
Is it easy to get?
Accounts receivable financing is easier to get than most conventional business funding solutions. The most important qualification requirement is to have credit worthy commercial clients. Also, your company should not have major tax issues and your receivables should be free of liens.
You can usually get a proposal within one business day of submitting your application and your line can be deployed shortly after you approve the contract. Additionally, here are some resources to help increase your chances of getting funded along with some common mistake to avoid.
You can also watch this video to learn about factoring accounts receivable.
Rates as low 1.5% for qualified clients. Advances as high as 85%
Get an a/r factoring quote. Or call (866) 730 1922 USA & Canada