Funding Your Cash Flow Using Accounts Receivable Factoring

August 28, 2013 3:43 pm18 commentsViews: 103

AR1Keeping the cash flow is a challenge for all businesses. Does your company face cash flow challenges because of slow paying customers? Have you been forced to decline new opportunities because of cash flow issues?

 

As every business owner knows, sales alone do not measure the profitability of a company. Sales may be increasing, but a company may have to wait weeks or even months for payment. During that time, your company cannot purchase materials for more orders, meet payroll, or other basic operating expenses. Your business will incur a cash flow gap between the time cash is required for inventory, payroll and operating expenses, and the time cash is received from customers paying on terms.  Cash flow funding through account receivable factoring may be just the tool needed during cash flow gap.  

 

How Does Factoring Work?

 

Account Receivable Factoring is the exchange of creditworthy commercial accounts receivable for an immediate injection of working capital.  It involves the selling of customer invoices at a discount to obtain the cash in a more timely fashion (typically within 24 hours of invoicing your customer).  With accounts receivable factoring, the amount of funding available to you is only limited by the creditworthiness of your customers.  This is how it works :

  • Your business sends invoice to your customer and a copy of the invoice to the factoring company
  • The factoring company purchases the invoice from your company advancing around 70-80% of the face amount of the invoice. 
  • When your customer pays the invoice, the factoring company will remit to you will the reserve portion minus a nominal service fee. 

In Factoring, Who Owns The Receivables? AR2

 

In a traditional factoring arrangement, you actually sell your receivables to another company (a “factor”) at a discount.  After the sale, the receivables are carried on the factor’s balance sheet since title has passed. Because the factor then owns the receivables, it generally provides all the required credit, collection and accounting services necessary to collect the receivables, including assumption of the ultimate loss exposure from the client debtor. The important difference between factoring and asset-based lending is ownership. In factoring, the receivables are purchased and owned by the factor. In asset-based lending arrangements, accounts receivable are pledged to the lender as security for the loan, but the borrower retains ownership and complete control of the receivables and the value of the receivables remains on the borrower’s financial statement.

 

What Are The Advantages of Factoring?

  • It is based on the creditworthiness of your clients instead of your financial history.
  • It allows quick access to working capital, instead of waiting 30, 60 or 90 days to    receive the payment from your customers.
  • It solves your cash flow gap as money is immediately available on demand.
  • It does not create a financial liability on your company’s balance sheet
  • It generally requires no other collateral (outside of the receivables).

 

Who Are The Ideal Candidates?

  • Start-ups
  • Companies suffering financial setbacks
  • Service Companies
  • Companies with seasonal orders
  • Companies seeking cash flow support
  • Companies seeking credit assistance
  • Businesses experiencing rapid growth
  • Non-bankable businesses

 

When you plan for your business growth, you need to assess your working capital needs and cash flow gap in order to ensure that your plans can be met.  Utilizing an accounts receivable factoring program can assist in your successful growth. But, be sure to assess the cost of the accounts receivable program as a percentage of sales. And, make sure that you do not have a term contract with the factoring company so that you may exit the program whenever your business has grown to the next plateau.

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