Factoring Receivables: How to Begin the Process

Posted by John Mauldin on Mon, Jan 28, 2013

factoring receivables, accounts receivable factoringIf you’re entering 2013 thinking that something has to change for your business, there is no time like the present to set the wheels of change in motion.  We want to chat a bit about how accounts receivable factoring can help you in that effort.

One thing we see a lot of business owners struggle with is cash flow. If you find that you always seem to be disorganized, have a hard time getting a handle on which vendors are owed what and when, how much inventory needs to be purchased and making payroll, then you are definitely struggling with cash flow issues. This is where weighing your options is very important. It probably wouldn’t hurt to consider some form of small business financing.

In this current economic climate you may find it difficult to obtain traditional small business financing through a bank. An alternative option is to seek out a small business factoring line. Consider small business factoring especially if you have customers that pay in 30, 60, 90 or 120 days. You can’t successfully run your business and manage your cash flow if your customers take that long to pay you.

Wondering what factoring is? Factoring is simply selling your creditworthy receivables to a third-party commercial finance company known as a factor.

Advance rates vary from company to company, but are typically around 80%. Once the invoice is paid, you get the remaining portion back less any fees. It’s a pretty simple process.

Factoring especially comes in handy if you own a manufacturing company and you have multiple operating cycles, also known as cash conversion cycles. This is the amount of time it takes for a company to purchase inventory, convert it into sales and collect the revenue from the sale.  

As you may be have guessed, factoring is a great way to bridge the gap between when an invoice is billed and when the cash is collected. 

How Do I Get Started
How do you get started? Really, it’s quite simple. First, find a factoring company who services your type of business. Make sure to have business documentation ready because a good factoring company does a thorough credit review of your business.

Additionally, you’ll need customer information ready for the factor. Information such as:

  • Customer name
  • Address
  • Contact for accounts payable
  • Phone number

Depending on the factoring company you decide to go with, everything is done online and is virtually paperless. Approval may even take less than a week.

Types Of Factoring Programs
There are different factoring programs, or strategies, to assist you in managing your cash flow. Keep in mind this doesn’t necessarily apply to every factoring company.

  • Consider trying to factor all of your company’s receivables. While you’ll be responsible for the factoring fees, they are a small price to pay to make sure your company has adequate cash flow to operate. 
  • Factor receivables on an as needed basis. By planning out your cash flow needs and determining how much you need to factor, you are able to keep your factoring costs minimal. Make sure the receivables are related to your strongest customer (in terms of creditworthiness). They may be the ones that pay the fastest, which helps reduce costs.

As a small business owner, you must have some sort of game plan in order to succeed. Factoring is a great way to get your company going in the right direction. 

Want a little more information about accounts receivable factoring? Download Accounts Receivable Loans: What Are The Options? This FREE Tip Sheet will detail how accounts receivable loans offer a reliable and accessible source of funding for your business.

Accounts Recievables Loans

Ready to take charge of your cash flow today? Call 888.833.2286 to speak to a Cash Flow Consultant now!

Tags: Accounts Receivable Factoring