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An Introduction to Accounts Receivable Financing

Copyright (c) 2007-2012

Accounts receivable financing or factoring, as it is called in the financial industry, can be combined with various other financing methods to help a business to accomplish an effective cash flow process.

It's all about the business owner's mental attitude and enthusiasm. One has to be aware of his or her point of view and how they think about their business. Of course one can't make up their own rules about how commercial finance companies, financial institutions, and banks work. What they can do is opt to alternative financial resources that are available to them. When regular small business financing methods such as credit and loans are limited, some small business owners turn to an accounts receivable finance company for the help they need.

As an entrepreneur and small business owner, the individual may well know the struggle of attaining capital in order to finance the growth of their business. Cash flow shortages can seem like a real nightmare, even to the most optimistic persons.

Accounts receivable funding can be a form of quick financing. It does not require a business plan or tax statements. The use of an accounts receivable factoring company has saved many businesses from the grips of financial terror and ruin.

Accounts receivable loans are the selling of outstanding invoices or receivables at a lower price to a finance company. The rate at which a company can sell their invoices will be anywhere from 70-90% of the original value of the available invoices.

The finance or factoring company will complete a credit analysis on the account debtors (Payors), whose invoices the business plans to factor, and credit limits are assigned on a per account debtor basis. The advance rate that is assigned to the customer's account will depend on the age of the receivable and the account debtor's credit rating. Any accounts receivables that are over 90 days old are typically not financed. An adequate advance based on the unpaid invoices can provide substantial cash for the necessary bills and other costs assumed with running the supplier's business.

When a business takes the opportunity to outsource their accounts receivables to a financial company, it frees up their own resources, enabling the business to focus on more productive activities such as selling the company's products and services.

Any business manager who is considering the use of a factoring company to help them liquidate their invoices should ask themselves the following questions:

1. Is the immediate cash-on-hand really necessary for the survival of the company?

2. How does this action match the company's business plan?

3. How can the company take advantage of the opportunity in more ways than one?

4. Is the business ready for more cash and growth expansion?

5. Have other possible sources of business financing been explored?

6. What are the current trends in the industry? Is there a weak or dry spell on the horizon?

7. Is it really a favorable time to finance?

Carefully consider all options and reasons. For some businesses, the discount rate could mean the difference between survival of the business and going bankrupt. Spend the necessary time to dig deep to investigate the factoring companies being considered and their costs.

Using accounts receivable financing or factoring can buy a business time to eventually qualify for a regular line of credit from a financial institution. It can also give the business the necessary time and cash flow to boost income, so that the business can grow and thrive.

Be careful when selecting a receivables finance agency. Pay close attention to the fine print of the contract; the factoring company's contract might include invoice minimums, monthly minimums, regular audits, facility fees, and other hidden fees. The business manager should make sure to notice and understand any excess or assumed costs or fees, when utilizing a receivables factoring company.

Once the facts of the various offers are known, the decision maker will be better prepared to know a good factoring company when they see one. With some receivable loan agencies, an account will be set up within three- to five- working days, while other providers may take up to 30 days. Some factoring companies can only finance your invoices up to a few thousand dollars, while others have the financial resources to support your business invoices up to ten million dollars. These are all important options to weigh when choosing a factoring service.

The use of an accounts receivable financing company can be a very advantageous. Such a service allows the business to focus on sales and operations, without having to worry about invoices getting paid on time.


About The Author:
Copyright (c) 1st Commercial Credit.
Toby Seibert writes about commercial finance. 1st Commercial Credit can help you with your business growing pains, with financing rates as low as 1.59%, with no fees and no minimums. They finance invoices from $5,000 to up to $10 million with flexible approval decisions. Call 1-800-450-9653 or visit their website: http://www.1stcommercialcredit.com

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