Running a small business is challenging. There is usually more work to go around than there are people. With so many things to do, micromanaging cash flow isn’t at the top of the list. Yet cash flow is vital to the growth and success of your business.
Did you know that one of the top reasons business fail is lack of capital? Even if sales are through the roof, if you don’t have the capital to fulfill orders and pay expenses, it’s possible to go out of business before you ever collect on those sales.
Account receivable factoring is one of the ways to ensure you have enough capital to operate when your cash flow gets tight.
What Is Accounts Receivable Factoring?
Unless all of your sales are on a cash basis, you are extending credit to your customers when you make a sale. You send them an invoice that is payable in 30, 60 or 90 days. These invoices are called accounts receivable, which is an asset to your business. But this asset doesn’t do much good unless it turns into cash. Accounts receivable turns into cash when an invoice is paid. Turn AR into cash by selling those invoices.
Factoring is simply selling those invoices to another company known as a factor. The factor typically purchases the invoices at a discount, usually around 80%. When your customers pay, the factor sends you the balance of the invoice minus the fee they charge for the service.
Invoice funding through a factoring company lets you get cash up front while the factor takes care of collecting. You don’t have to worry about a late payment causing cash flow issues on your end. Your cash flow is as consistent as your invoicing.
Since the amount of funding you receive is based on your customers, the amount of funding you receive grows with your business. Factoring isn’t dependent on the credit strength or the operational history of your business like a traditional loan is.
How Does Accounts Receivable Factoring Help My Business?
Factoring has many of the benefits of traditional financing without the long list of requirements that a bank would have you meet. Factoring also allows you to leverage the resources of the factor in a way that you could never do with a bank loan.
Get Cash The Same Day You Invoice
- The initial approval process takes days, not weeks. Thereafter, you typically receive cash the same day that you submit the invoice.
- No more worrying about making payroll.
- Have the funds to take advantage of early payment discounts offered by your vendors.
- Pay tax obligations on time.
- Free up cash for marketing and new business development.
Reduce Time, Risk And Costs
- The factoring company, with years of experience in underwriting, assesses the risk of your customers. No more invoicing a new customer, crossing your fingers and hoping they pay.
- Outsource your collection department to the factoring company.
- Many factors do not require the extensive reporting that banks and traditional lenders require. Factoring eliminates the time and cost of preparing these reports.
- It’s incredibly convenient when you use a company that does factoring online. Submit everything electronically. No more dealing with paper invoices and the time and cost to mail everything out.
Accounts receivable factoring is a great option for many small businesses. It allows them to get through a cash flow pinch and save them money in the process.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.