What is Accounts Receivable Factoring?
In certain businesses, there are transactions where customers promise to pay for goods or services at a later date. The business issues invoice for these promises to pay. A factoring company then pays the business for these invoices. The customers in turn pay the factoring company on the agreed date. These are called accounts receivable factoring.
This method is sometimes known as factoring invoices. This is a financial modality that turns your invoices into cash immediately. This gives small business owners steady cash flow. And it can help businesses cope with its payroll, supplies, merchandises, and other expenditures needed for the business to grow.
Factors to Consider with Accounts Receivable Factoring
Just like any other financial matters, there are things that you may need to consider when opting for invoice factoring. Here are some guidelines when opting for accounts receivable factoring:
- Know when and why you need invoice factoring
One of the main reasons why a small business would opt for invoice factoring is because it needs funding immediately. Whether it is to pay for manning services or to purchase supplies, invoice factoring can help with the cash flow that your business needs.Another reason why a small business owner may choose invoice factoring is because his or her bank loan has been denied. When a business needs immediate funding, factoring transactions may help resolve the issues.The rule here is to understand how factoring works. It is also best to note how factoring can help you manage your business.
- Identify and choose the right factoring company
When choosing receivables factoring companies, you may need to get into the details of the contract that you are getting into. Most factoring contracts have a fixed period of time. Other contracts have a certain number of invoices that need to be factored. And some have a factoring fee.These are important details that need scrutiny before signing a factoring contract. Determine if you are able to meet the terms of the contract you are about to sign. Some of these factoring companies are enjoined with a cancellation fee in case the terms of the contract are not met.There are factoring companies that do not offer contracts. These are more flexible because you may choose to factor selected invoices. You may also choose to change a factoring company if you feel that they are not a good match.
Whether or not there is a factoring contract, business owners should choose a factoring company that can meet his or her business goals.
- Whether or not the factoring company offers cash advanceWhat is a cash advance?
When you factor an invoice, the factoring company may provide a percentage of the invoice value within 24 hours. This is known as cash advance. The advance rate is typically set between 80-95%. The rate varies depending on the kind of industry your business belongs to.Once the customers pay the factoring company, the latter will then pay you the balance. In paying the balance, however, the factoring company may consider deducting some fees as necessary.
- Invoice factoring provides convenient and fast transactions
Factoring companies may sometimes require tons of paper works before approving a factoring invoice. Others operate entirely online which can directly tap into your accounting platform. With the online link between your business and the factoring company, assigning invoices can be made easily. In some instances, even invoice advances can be made online as well. This makes accounts receivable financing fast, easy and convenient.Invoice factoring is a great way to help your business keep up with your financial demands and challenges. Just remember to choose the right factoring company that can assist you with the funding you need.
Advantages of Accounts Receivable Factoring
Invoice factoring is beneficial both to small business owners and factoring companies. Here are awesome advantages of accounts receivable factoring:
- Factoring provides a free back-office support
With invoice factoring, another entity is managing the collection of invoices from customers. This can help business owners focus on the other aspects of growing the business.
- Factoring is based on the quality of your customer’s credit
The focus of factoring companies here is how to collect payment from customers and not from you. Risk of factoring companies fall onto the customers and not your business. The factoring company bears the risk of long wait and default in case of non-payment from customers.
- Factoring can be customized
There are invoice factoring companies that provide flexibility in terms of factoring. Small business owners may factor an unpaid invoice only as capital funding may require. Factoring may also be disregarded if there is no need for immediate funding.
- Factoring should not be considered as a loan
When you opt for invoice factoring, you transfer the rights of collecting payments to another entity. Thus, when you factor, you are not availing of a business loan. A factoring company helps to manage the collection of unpaid debts from your customers.
- Factoring is scalable
This means that as you increase factoring services and receivable factoring, you also grow your business funds.
- Factoring provides a stress-free cash flow
With invoice factoring, business owners need not worry about the needed funding for payroll, supplies, merchandise and other business needs. Cash flow becomes steadier and available as the need arises.
Accounts receivable factoring is one of the best ways to get your business going. It can help business owners in a lot of ways. It is an easier, faster and more convenient way of maintaining and establishing a good cash flow for your business.
What are you waiting for? Why not turn those invoices into cash, and have a stress-free cash flow?