Are your company s invoices being paid slowly? Or are you involved in a large government contract and expecting payment will come at the end of a project, not in the midst of it? All businesses regardless of size need a steady stream of revenue to keeps themselves and their employees (via payroll) afloat.
Accounts receivable factoring and financing might be the solution to cash-flow shortages facing many small businesses. Being paid by clients/customers in a reliable or timely fashion is significant; companies can t run on the promise of being paid, they need invoices returned promptly. Even reputable agencies and businesses can suffer from slow-downs in invoice paying; perhaps they are, themselves, awaiting funds to come through from other sources, also.
Regardless of the individual scenarios causing slow or delayed payment of invoices by customers, businesses can t functionally operate without the funds necessary to cover payroll, rent or inventory costs. Accounts receivable factoring and financing offers businesses an opportunity to get well-needed cash during lean times. Accounts receivable financing involves borrowing against or selling a company s receivables to a third party company that will pay them the amount they are owed, minus a fee for the service.
This fee for service is labeled a discount, and the amount of the discount varies depending on the size of the transaction. Also considered when determining the discount is the amount of risk that the financing company which is buying the receivable will incur. The circumstances surrounding the receivable are important.
If a larger, reputable firm owes money in a relatively short amount of time, the company will receive a larger portion of the funds. If a payer is already months behind and of a less-reputable nature, the factor, or financier will charge a larger discount for services. There are essentially three different kinds of accounts receivable financing to consider: factoring, accounts receivable line of credit and accounts receivable loan-contract financing.
Factoring: This involves selling an invoice to an invoice factoring company. With this option a company gets immediate cash at a higher percentage of the face value, usually 80%. In this scenario the financing company (factor) manages the collection of the receivable, and when it is finally paid in full, the selling company is paid the remaining portion of the debt due, but minus the service fees or discounts of the factoring company.
Accounts receivable line of credit: A line of credit against receivables due is facilitated in this option. Like factoring, a relatively quick transaction time occurs, and the selling company receives a large portion of cash (80% or higher). The amount that will be offered, however, is based on an assessment of exactly how much is due in receivables.
With this form of credit the company which is borrowing against its unpaid invoices retains a larger portion of control and client contact than the factoring option. Accounts receivable loan-contract financing: With this choice the selling company has a set period of time (3-36 months) to pay back a loan against accounts receivable. In this case the selling company has the largest amount of control regarding contact with debtors and these processes.
Here capital locked in contracts can be accessed, although this is a more difficult form of financing for which to qualify. Accounts receivable financing companies often specialize in servicing specific industries or types of businesses. It is important to understand the logistics of this type of financing, and these shouldn t be used as consistent or structurally established methods of keeping a company in the black.
There may be reasons for perpetual late payment by customers, and this may need to be addressed by the invoicing business itself.