Introduction
If your business needs money fast, and you're not able to get an advance
from your bank, you may be considering factoring. If that's the case, this article
will help you understand what accounts receivable (or factoring) is, how it
works and why it can be a valuable tool for your business.
When to Use Accounts Receivable Financing
If you are over-trading, if your cash flow has become an issue, or if customers
are slow to pay their invoices then accounts receivable financing is an ideal
solution. Accounts receivable financing can be used to provide short term
working capital for any business.
How Accounts Receivable Financing Works
Accounts receivable financing is a way to get cash for your business by
selling your accounts receivable to a third-party lender. Essentially, the
lender pays you immediately and then collects the money from your customers
later.
For example, let's say that you're an e-commerce merchant who sells $10
million worth of products per year. You've already collected half of this
amount in advance through credit cards and PayPal, but now it's time to collect
on the other half—but there's no way you can do that without some help. You're
stuck with too many outstanding invoices at any given moment and not enough
cash flow in hand!
What Are the Costs of Factoring?
The cost of factoring depends on a number of variables, including the size
of your business and the amount of time you need to pay off your debt. If
you're looking for an account receivable financing provider that will provide
you with more than one option, there are plenty out there.
Here's how it works:
·
The factoring company pays for all or part of
your invoices in return for receiving payment from those invoices from
customers within a certain period, usually 30 days or less. This allows
businesses to get cash quickly while still being able to make a profit by
collecting interest on their accounts receivable as well as fees charged by the
factoring company itself. For example: You sell $100 worth of widgets at $10
each; let’s say that half-a-year later (60 days), one customer paid off all his
purchases ($40) plus interest ($2). That means his total purchase price was $42
but he only paid $40 because he bought these items 60 days ago! * What does
this mean? It means that companies who use this financing method can actually
receive money from customers before they even know they have made any sales—and
then pay back those same customers over time so that everyone wins!
How to Find the Best Factoring Company for Your Business
When you’re looking for a factoring company, there are four important things
to look at:
·
Rate – The rate you receive will depend on your
business credit-worthiness, the amount of risk that the bank is willing to take
on and how much money it needs to make a profit.
·
Service – You want a company that provides
excellent customer service and makes sure your financial needs are met in an
efficient manner.
·
References – Check references with similar
businesses as yours, talk directly with past customers and visit their
facilities if possible.
·
Reputation - Look at what other people say about
the company online as well as through industry associations such as BBB or
Chamber of Commerce
Learn about accounts receivable (or factoring) as a tool for spanning a
cash crunch.
Accounts
receivable financing is a tool for businesses that are in need of cash
flow. A business uses this type of financing by selling its accounts receivable
to a third-party company—that is, it sells its invoices to the factor. The
factor buys these invoices and then collects them from the customer on behalf
of your business. In exchange for doing so, the factor charges you interest on
those invoices until they are paid off (or until you settle up with them).
Here's how it works:
·
The first step is to find out if factoring is
right for your company. Some businesses don't qualify because they operate in
industries that don't generate enough receivables or have too many bad debts
(uncollectible bills). You can determine if this type of financing makes sense
by asking yourself three questions: Are my customers paying on time? Do I have
a consistent amount each month? Is there an industry trend toward faster
payment processing? If yes to these questions, then accounts receivable
financing may work well for your business.
·
Once you've identified factors as potentially
being viable options for growing cash flow, talk to at least three companies
about their programs and fees before making any decisions about who will be
responsible for managing collections from your clients going forward."
Conclusion
If you’re in the process of finding a factoring company, we hope that this
post has helped you better understand the process. If you are looking for more
information on accounts receivable financing or need help with your cash flow
crunch, contact us today!
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