Four Little-Known Accounts Receivable Loan Benefits

Posted by Jeremy Waller on Thu, Apr 18, 2013

Benefits of using a factoring company

Most people see factoring as nothing more than an accounts receivable loan. Business owners typically look to factoring to have more control over their cash flow. This gives them the funds they need to keep their business running. It also relieves much of the stress that comes with trying to coordinate the timing of payables and cash receipts.

Many don’t realize that there is much more to an accounts receivable loan than funding. You can get funds to run your business from any commercial finance company; however, a loan against your AR, more specifically a factoring loan, provides much more than cash.

The core concept of factoring is that the payments from your customers are used to repay the advance you received against the initial invoice. Because of this, a factoring company is focused on the quality and performance of your receivables and your customers more so than any other lender.

This focus provides four very special benefits for you – risk assessment, collection services, minimal reporting, and nearly unlimited capital.

Risk Assessment

You may not think of it this way, but every time you invoice you’re extending credit to your customer. You’ve provided a product or service based on their promise to pay. How confident are you that they have the ability to pay? Do you perform due diligence on each of your customers?

When you have an accounts receivable loan with a factoring company you will get detailed insight into the credit quality of your customers. The factor will pull credit information from a number of sources to determine the level of risk you’re taking in extending credit to that customer. With factoring, you essentially get an in-house credit group dedicated to assessing the quality of your customer base.

Collection Services

Collections are one of the last things a business owner wants to deal with. Nothing ruins the relationship with the customer faster than having to call and hound them for payment. On top of that, collection efforts take a significant amount of resources. Many businesses have one or more individuals dedicated to collecting past due invoices.

If you’re a smaller business, you may be making collection calls yourself. What an incredibly unproductive use of your time! Imagine what you could get done if you had that time back to focus on more important areas of your business.

Since the factor is relying on your customers to repay the accounts receivable loan, they have a strong interest in receiving payment on any past due invoices. Most factors have a team dedicated to following-up on past due invoices. The time and money the factor spends pursuing past due invoices is time and money that doesn’t come out of your pocket.

Minimal Reporting

Whether you have personal experience in dealing with a large bank or not, know this: they will require a ridiculous amount of reporting if you get your financing through them. You will have to provide financial statements (including audited statements which are very expensive to have prepared), calculate loan covenants, prepare borrowing bases, generate aging reports and more. Many businesses end up hiring and additional person just to deal with the extra reporting.

An accounts receivable loan from a factoring company requires minimal reporting, if there’s any reporting at all. Copies of invoices are all that is typically required.

Nearly Unlimited Capital

A great benefit of loans based on your accounts receivable is that the loan grows with your business. As your accounts receivable increases, the amount you’re able to borrow increases as well. Unlike a term loan or traditional bank financing, there generally isn’t a hard cap on the loan. The only real cap is the dollar amount of AR on your books.

This makes factoring a perfect tool for growing businesses.

An accounts receivable loan provides benefits that you won’t get with any other form of financing. Be sure to consider this when evaluating your options for funding your business.

 


Tags: Cash Flow, Business Loans, Accounts Receivable Factoring