The Benefits of Accounts Receivables Financing
Cash flow shortages can hinder any business, which is why many turn to accounts receivables financing. Also known as factoring, businesses sell their outstanding invoices for a small percentage of the amount of the receivable. The factor advances a percentage of the invoice and normally waits 30 to 45 days for payment. The business gets cash to use immediately to fund operations. Once the invoice is paid, the factor remits the balance of the invoice less the factoring fee.
Businesses of many sizes and industries have found significant benefits when choosing this source of financing. When cash flow is at a premium, consider these reasons for choosing accounts receivables financing.
Turn Receivables into Cash Quickly
Managing cash flow to meet business obligations is an important function that can ultimately mean the success of the business. Companies that factor invoices have access to cash from those sales quickly. The cash may be used to make payroll, purchase more raw materials or inventory, or pay taxes and other bills. Cash is often available within just a couple of days after turning the invoice over to the factor rather than waiting a month or longer.
Outsource Collection Functions
Factors typically take over the role of accounts receivables manager to ensure that invoices are paid on time. When payment isn’t made as expected, they frequently work to resolve any issues so that payment will be remitted. Meanwhile, business owners and their accounting teams could be focusing on other tasks to generate additional sales and revenue for the company.
Keep Debt Off the Balance Sheet
Accounts receivables financing is generally classified as a sale rather than additional short- or long-term debt. Businesses may find it easier to meet their bank’s financing covenants and qualify for other credit in the future. Additionally, factors who purchase invoices have not historically required additional collateral from the business.
Evaluate Factoring Options
Evaluating several factoring sources before signing with an accounts receivables financing firm can help you find the right source of credit for your circumstances. Some require long term contracts and a minimum dollar value of invoices per month, while others give more flexibility. It’s also important to know whether the company will be responsible for repaying the factor if the invoice is not paid, as both recourse and non-recourse financing are available in the marketplace. Shopping for competitive options and negotiating terms and prices can result in a mutually beneficial financing arrangement that provides needed liquidity for the business.