Accounts Receivable Factoring: Small Businesses Leverage Receivables

Posted by Jeremy Waller on Mon, May 13, 2013

Leverage your accounts receivables

Leverage - The advantage gained from the use of a tool. In the physical sense, leverage gives you the ability to move a larger object that you would otherwise be able to do unassisted. In business, leverage allows you to do more with fewer resources.

Leverage may manifest itself in a number of ways. Having special knowledge and experience is leverage gives you a strategic advantage. Automation available with machines and software is leverage that improves your efficiency. Accounts receivable factoring is leverage that gives you a financial advantage.

What is Accounts Receivable Factoring?

Accounts receivable factoring is a form of financing. It provides working capital to run your business just like many other forms of financing do; however, it is unique in a number of ways. To better understand factoring, let’s step back and talk about other common forms of financing.

Term Loans

The most basic form of financing is a term loan. Many small businesses get their start-up capital from a term loan. The main problem with these types of loans is that the funding available to you is fixed. You have a set amount that you can borrow and that’s it. If you need additional funds, you’re looking at a complete loan restructure which takes both time and money. On top of all of this, your personal assets will likely serve as collateral for the loan.

Lines of Credit

Another popular option is a line of credit. This form of financing is not as readily available to new businesses, but it may be possible to find a lender who will work with you. Underwriting typically involves looking at your personal finances as well as those of your business. A traditional bank will usually set your credit limit based on the financial performance of your business; however, there are some lenders that consider the value of your inventory, real estate or accounts receivable. Regardless, you still have a fixed credit limit. Furthermore, if your business is struggling financially, it will be difficult to get approval.

Accounts Receivable Factoring

Now with that being said, let’s look back at accounts receivable factoring. Factoring isn’t a loan. Factoring is a process of assigning your accounts receivable to a company known as a factor. The factor purchases your invoices at a discount. When those invoices are paid, you receive the remaining proceeds less the factor’s fee. Your business’ financial condition doesn’t play a big part in underwriting,  you don’t need years of operational history, and the amount available to you is only limited by your accounts receivable.

Financial Leverage Puts More Powder in Your Cannon

Leverage magnifies your efforts. As the business owner, you are the general on the field. You’re picking targets, developing strategies and leading the troops. When you’re sights are set on a goal, leverage gives you the extra ‘oomph’ you need to get there.

Factoring boosts your cash flow. You spend less time worrying about payroll and vendor payment and more time growing your business. You have leverage that puts you in places that your competitors can’t reach.

  • Bid competitively on projects without the worrying if you have enough cash to complete the project.
  • Negotiate discounts with your vendors.
  • Quickly ramp up your business if demand increases unexpectedly.
  • Move quicker than your competition to win new business.

Don’t Let Cash Flow Restrictions Limit Your Business

Do you have a wish list for your business that’s a mile long? I call this an ‘if only’ list. If only I had another sales person on staff I could drive more business. If only I had the capital to bid on bigger projects. If only I could focus on the future instead of worrying about just making it through the week.

An ‘if only’ list is only as good as your plan to achieve those goals. That plan boils down to two points –logistics and resources. Your experience and expertise provides the logistics. Accounts receivable factoring provides the resources.

Don’t let cash flow restrictions limit your business. Use accounts receivable factoring to unlock the cash that is tied up in your accounts receivable.

Tags: Accounts Receivables Financing, Cash Flow, Accounts Receivable Factoring