Updated : May 06, 2018 in Finance Accounting

Accounts Receivable Factoring is Popular Thanks to Unpredictable Cash Flow

Thanks to the economic circumstances worldwide, many businesses are experiencing unpredictable cash flow. If you are running a small or medium-sized business, then you know how tough it is to make incoming cash stretch to cover your short-term obligations. If you work with a factoring company, they can provide you with working capital when traditional funding is not available.

Also known as debt factoring, factoring involves selling your invoices to a third party, then in return this factoring company will process the invoices and allow you to draw funds against the money owed to your business. Factoring is basically a finance, ledger management and debt collection service industry.

Commonly used by businesses to improve cash flow, factoring can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies. Invoice factoring is an alternative way of drawing money against your invoices. But your business retains control over the administration of your sales ledger. In addition to providing finance, invoice factoring offers valuable support services.

Once you're set up with a factor, you'll be advanced a large percentage of the face value of the invoice. If you have credit worthy accounts receivables, you can exchange it for immediate cash available to you in less than 24 to 48 hours. Invoices can be invaluable assets – especially when the work or services are already completed, or the product has been shipped. If you are waiting for the invoice to be paid in the next 30-45 days, or longer.

The bottom line is that the cost of doing business with a factor is the discount fee. These fees can range from one to ten percent, depending on volume, as well as the creditworthiness of the customer being invoiced, plus risk. In most cases, a business needs the money owed to them well before their customers pay – even if the customers pay in a timely manner, which is typically 30, 60 or 90 days out.

With factoring, the balance of the funds, less the discount fee, is released back to you once the factor has been paid. Fees are often off-set by being able to take advantage of cash discounts, market growth and reduced late payment penalties. In addition to providing immediate cash for invoices, a good factoring company performs credit analysis on new and existing customers, follows up on invoices as they become due and provides timely updates.

Many people don't realize that factoring will give you and your business the ability to take advantage of volume discountsplus an improved credit rating.

Factoring companies are primarily interested in making sure that your businesses properly licensed and registered. Most likely they will ask if your products and or services of acceptable quality and consistent, and if the invoices are accurate, verifiable and creditworthy. Each business factoring company operates differently with a variety of basic costs.

In order to choose the appropriate factoring company, ask them how much experience they have and find out if any fees are being charged aside from the discount fee such as application fees, set-up, loan origination, administrative or maintenance fees. Ask if there any penalties? Does the factor charge of extra services such as providing credit services to your new customers? You should find out about the factoring company's reporting structure? Look for referrals like colleagues, suppliers, customers, CPA's, attorneys, or bankers that you can call to be good referral sources for a reputable factory company.