Posted by Nikki Wardle on Dec 6, 2016 9:00:00 AM

Accounts Receivable Financing

As your business becomes more successful and needs to grow you may find yourself in a position where your current cash flow isn't adequate to meet your growth needs. This is very common and is almost one of the milestones of your business, but that doesn't make it any less stressful. When faced with these issues many companies will visit with their bank to open a line of credit or some other form of financing. However, in these times of lean credit that option may not be a realistic one for you. Good news, though, there is an alternative that might fit your needs perfectly: accounts receivable factoring.

What is it?

Simply put when you "factor" your accounts receivables you are selling your invoices to another company who pays you their value, less a fee or percentage rate, and they become the payee of that bill. For example, some medical professionals may factor some of their insurance invoices. In this case, the insurance company pays the factoring company, not the doctor. This is becoming a more common way to free up cash flow in your business. Here are some pros and cons for factoring.

Pros of Factoring

  • It isn't a loan. That's right, factoring may be one of the only forms of financing that aren't a loan product. This saves you from having a higher debt load on your balance sheet which may come to be critical as you expand your work equipment.

  • Reduces paper pushed in your office. Factoring companies are known for having very tightly ran invoicing departments that verify owed amounts with your customers and are very prompt is payment isn't received on time. This decreases the time you will get money, while also reducing the amount of paper you have to chase down getting paid. You can increase your turn and free up that money for new equipment or other business costs.

  • Expands as you grow. Instead of having to go through steps of applications for more funding as your business grows factoring grows with your business. Your financed, or factored, amount grows as your revenue, and corresponding accounts receivables, increases. This can be a huge benefit when faced with a large equipment requirement for your next big project.

Cons of Factoring

  • Sometimes costly than a bank loan: The fact of the matter is that factoring your invoices will cost you more as a percentage of revenue than a traditional loan product. You should carefully consider your cash flow requirements and business needs to make sure the extra cost is worth it regarding the value it brings your company.

  • Customer perception: When you factor your invoices the factoring company will send a letter of notification or assignment to your customers that inform them to pay the factoring company. Some business owners worry that this will reflect negatively on their business, or raise red flags with clients. The easiest way to avoid any awkward perceptions is to own your decision and inform your customers first, so they understand what you are doing, and why. They will understand.

Bottom Line

Factoring can help you free up capital and give your business the cash injection it needs to grow. If you think this is the solution for you, feel free fill out our initial application and we can help you know what your options are.

Guide to the benefits of leasing

Nikki Wardle

Written by Nikki Wardle

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