An accounts receivable is a transaction between two businesses whereby one business sells to another on terms. Payment terms can vary depending on the party’s agreement, but net 30 is typical. An accounts receivable (invoice) is sent to the buyer once the seller delivers the product/service. This invoice becomes an asset of the sellers business and can be sold in exchange for cash. Accounts receivable financing allows the seller to get a high advance in the form of cash, immediately by selling the receivable to a third party. This is called Accounts Receivable financing.
One of the first things to come to a business owners mind when hearing the word Factoring is cost and way too much of it. However, this isn’t necessarily the case. As a matter of fact, depending on how one views the situation, it may actually not be a cost at all. It is easy to always focus on cost and this is often the first question that is asked from a business owner to a Factor, “how much will this cost me?” When in reality this should not be the first question to ask; but “how can it benefit my business?”
It is important to look at the benefits of Factoring and how it can improve cash flow. Can the availability of cash actually allow for other cost savings? The overall scenario needs to be analyzed and a full understanding of why Factoring should be used needs to be thought over. There is not one single answer for all business owners as to why the cost of using a Factor is justified and actually beneficial. Just as companies have their own unique products and services, they also each have their own specific needs for cash and reasons for managing it in a particular way.
Over the past 10-15 years the trucking industry has faced numerous struggles with the huge increase in gas prices wiping out many of the small carriers that could no longer compete based on pricing. The majority of the independents had to give up their freedom of being self-employed and forced to work for or be bought out by the larger carriers. Now that the economy and gas prices have dropped and somewhat leveled off a bit numerous small carriers are once again reviving and jumping into the competition mix.
Over a year ago the world factoring total stood at well over 2 trillion dollars. While businesses seem to be familiarizing themselves with the advantages of factoring as a whole, there are still a number of questions that go unasked. Certain problems will arise and relationships become strained when we don’t have all the facts prior to establishing a business relationship.
BOOMER………… SOONER! BOOMER……….SOONER! Okay – sorry I’m still celebrating OU’s win over Alabama. I bet I got your attention though……. Small business owners…….you know who you are…….. There are a lot of small businesses out there that struggle at times with one thing……………..cash flow!
Three words to live by………..CASH IS KING! Say it with me………….CASH IS KING!
You might be building that customer base, delivering that product or service, generating revenue. But there’s one big issue………………you’re not converting you accounts receivable into cash.
It can take up to 30, 60, or even 90 days to collect your receivables.
Folks………….you cannot efficiently run a business if you do not have the cash needed to operate.
You can’t even take care of the most simple of day to day tasks:
Pay your vendors.
Make that all important Friday payroll.
Drum up more business………..yes business development costs money as well.
Yes…..my rant is leading to a suggestion.
Two words……………….invoice finance, otherwise known as factoring.
Factoring is a form of short term business financing where you simply sell your credit worthy receivables to a third party known as a factor. Advance rates vary but are typically around 80%.
Once the invoice is paid, then you get the remaining portion back less any applicable fees.
This is a great way to bridge the gap between when an invoice is billed and when the cash is collected.
The Benefits of an Invoice Finance Factoring Facility…………………
Here are some ways your business can benefit from obtaining short term financing.
- Short term business loans like factoring facilities are easily accessible.
With the advances in technology, many banks and small business lenders have made it fast, easy, and efficient to obtain small business financing such as factoring facilities. In some cases it can take only a few days. In many cases, there is very little paperwork required.
In fact, if your business uses a factoring facility through a small business lender or factoring company, and you request a credit limit on one of your customers, you could get an approval in as quickly as 24 hours (depending on the strength of the company).
- Short term loans are just that…..short term. You as a business owner are not indebted to a bank or lender for a significant amount of time.
- Depending on the type of financing you go after, it doesn’t always break the bank (no pun intended).
If you obtain a invoice finance factoring line, then you may only pay fees based on the outstanding invoices.
If you factor invoices related to strong credit worthy customers that could pay quicker, then you may save some money on the fees paid while improving cash flow.
In my tenure in the commercial finance industry, I’ve seen a great number of businesses that benefited from the use of short term financing and invoice finance factoring facilities all the while keep fees to a minimum.
- Short term business loans and invoice finance factoring facilities can provide relief when your cash flow is tight.
There has been numerous times where I have seen a lot of small businesses waiting for a large invoice to be paid resulting in constrained cash flow. This is where an invoice finance factoring facility can help alleviate that strain.
Proper cash flow management is a vital in successfully running your business. Investing in an invoice finance factoring facility can really help make managing your cash flow easier. Beyond that though, making sure you have a quality customer base is important as well. If you own a small business and you find that these two things you have a hard time with, then hopefully following some of the benefits mentioned above convince you into investing in an invoice finance factoring facility. It can help you get your business back on track.
Defining the Terms
As you’re searching among numerous accounts receivable factoring companies for just the right one, you’ll undoubtedly come across a litany of similar terms that may be confusing.
Factoring Agreement: Understand Before You Sign
Factoring Loan: Finance Made Easy
Businesses need funding to survive. You have to have cash to purchase inventory, pay employees and cover overhead. I have, unfortunately, seen many businesses struggle due to inadequate funding. When cash is tight for an extended period of time, there comes a point where you, as a business owner, have to make tough decisions about your business.
Factoring Loans Aren’t Really Loans, But They’re A Great Way to Fund Your Business
Factoring Charges: Keep it Simple
As a small business owner you know one of the most important challenges you have is keeping your cash flow predictable. With that in mind Fast A/R Funding created the OneFee factoring to make the charges associated with factoring as simple and easy to understand as possible.
Tags: Invoice Factoring