Taking the Accounts Receivable Financing Leap

Is Account Receivable Factoring for You?

Business owners know first hand about the struggle of attaining capital to finance the growth of your business or meet cash flow shortages. When regular business financing such as loans and credit are limited, some business owners will turn to accounts receivable financing. Is accounts receivable financing right for your business?

What is Accounts Receivable Financing?

Accounts receivable financing is the selling of outstanding invoices or receivables at a discount to a factoring company that assumes the risk on the receivables and provides quick cash to your business. The amount of value assigned to the account depends on the credit worthiness and age of the accounts receivable. Any accounts receivable over 90 days are typically not purchased. Accounts receivable financing is also known as accounts receivable factoring or accounts receivable funding.

Benefits of Accounts Receivable Financing

Reduce Working Capital Investment: Many companies have the majority of working capital tied up in inventory leaving little investment capital available for marketing or other needs of the business. Selling invoices to a factoring company allows a business to free up capital tied up in inventory.

Pass On Collections: Outsourcing your accounts receivable management to another company, frees up your resources to focus on other more productive activities such as selling.

Quick Financing: Accounts receivable factoring does not require a business plan or tax statements. It's a quick form of cash often used for businesses experiencing a cash crunch.

While these are some of the many benefits to factoring your accounts receivable, there are potential drawbacks to using this method to finance your small business. One of the biggest factors of accounts receivable financing is the “perceived cost”. In reality the “perceived cost” (financing cost) is completely mitigated and them some, because of the tremendous reduction in the investment in working capital needed to process the business transactions.

Before you embark on using accounts receivable financing for your business, consider the following questions:

• Is your business ready for more working capital, less taxes, and expansion?
• Have you explored all possible sources of small business financing?
• Did you know the impact on your bottom line using this financing strategy could be analyzed prior to applying for financing? The Invoice Profitability Calculator is a product that performs a complete profitability analysis of the bottom line for any business considering selling accounts receivable to a factoring company. Since factoring will “always” impact the bottom line in a positive manner in spite of the “perceived cost” of factoring, it is important to be able to know what the impact on the bottom line before considering selling invoices.
• Is the money needed necessary to take advantage of an opportunity? Often the improved cash flow and reduction in the investment in working capital yields a dramatic improvement in the internal rate of return on that capital.

Taking the accounts receivable financing leap can sometimes be the difference between company survival and bankruptcy. Carefully consider all your options. Even though the factoring industry is not as regulated as banking, using accounts receivable financing can buy time to eventually qualify for a regular credit line from your bank.