Cash flow shortages can happen to almost any business, but account factoring can provide a quick, easy solution. Account factoring involves the selling of your invoice factoring account receivables or invoices to secure immediate working capital.
Account factoring lets you unlock cash that’s tied up in your unsettled invoices. Obtaining cash this way can be an easy, effective tool to end small or medium size businesses financial challenges. Account factoring might be right for your business if you lack adequate working capital to maintain your operations or expand to the next level. Perhaps you’ve considered additional options like bank loans, lines of credit or credit cards. If you company doesn’t have enough financial stability or business credit, account factoring could be the perfect alternative to bank financing.
Here’s why: Approval for account factoring doesn’t hinge on your company’s credit history. Instead, it depends on the creditworthiness of your customers. Companies that purchase invoices will evaluate customers based on their stability and payment track record. The account factoring company’s main concern is determining how likely customers will pay and how quickly.
Apart from customers meeting qualifications, your invoices must also pass certain criteria. There cannot be any existing primary liens on your invoices, meaning no other company should have a claim on the payments once they arrive. This ensures that the company purchasing your invoices has a clear right to collect the funds in your place.
Just about any company that generates commercial invoices can take advantage of account factoring. But is account factoring right for your business? It could be if your business is struggling to pay bills because of long invoicing fertility cycles, you’re wasting time collecting down payments from slow paying clients, you’re unable to take advantage of career advancement due to lack of funds, or your business isn’t financially strong enough to obtain traditional bank financing.
Advantages of Account Factoring Besides providing fast access to capital, account factoring offers a number of other important advantages. It gives you unlimited access to funds without adding liability to your balance page. Because account factoring isn’t a loan, there’s no debt or every-month payments involved. Plus, account factoring is a flexible arrangement because it doesn’t require any long-term contracts.
Additionally, account factoring makes it easier for you to offer credit terms to customers. It will help you increase your sales without negatively impacting your cash flow. Account factoring also can help you take advantage of the early payment discounts many vendors offer on bills within ten days. Ultimately, account factoring can help build business credit. The bucks flow you create from account factoring causes it to be possible to pay your vendors on time and establish a stronger credit rating. And this can assist you with securing credit from other vendors and financial institutions.
Another significant good thing about account factoring is the professional commercial collection agency service given by the factoring company. The factoring company is equipped to handle debt collections professionally and efficiently, leaving your staff to spotlight core activities such as creating more sales. In addition, this will eliminate costs associated with processing invoices and handling collections costs.
How Account Factoring Works Account factoring is a transaction in which you sell outstanding invoices for immediate cash, instead of waiting the conventional 30 days for the invoices to be paid. You will get an up-front, lump-sum payment for your invoices that’s slightly less than face value. The advance payment which can be provided within as little as 1 day is typically 75 to 90 percent of the total account value.
After the purchasing company receives full payment for the account, you’ll be given the remaining value less a ‘factoring’ fee. This fee is based on a number of factors, including your consumer’s credit worthiness, the average terms, and the account number and size. However, generally, the account factoring fee is up to five percent of the account value.
To give you an idea about how account factoring transactions work, here are some of the main steps in the process:
1: You submit an application to an account factoring company.
Step 2: After you’re approved for account factoring with the company, you can start forwarding your consumers’ invoices to the company for cash advances. (Your customer will acquire bill from the factoring company, which will be responsible for all payments processing activities related to the account. )
Step 3: Assuming everything checks out, you’ll be advanced up to 90 percent of the value of the purchased invoices.
Step: Customers most likely submit payments to the company that bought their account. This provider, in turn, will forward you tenacious, unsettled component to the account removing from the total the account factoring fee, of course.
When choosing an account factoring partner, it’s important to select the right kind of company to work with you and your customers. Here are some important considerations to make note of:
a What type of reputation and track record does the company have? When you turn over customers, make sure they’re in good hands and that the factoring company is capable of providing the funding you need.
a How much is the account factoring company charging? Evaluate all the components of the price, including any fees, the interest rate and the component to your account that is held back in ‘reserve’.
a What are you going to get for your money? Determine their accounting, revealing and other capabilities.
a How will the account factoring company treat your clients? The company will have to communicate with customers after they control your invoices. You want to be sure the interaction that develops is positive. If it isn’t, it may reflect negatively on your own relationship with your customers.