Understanding Accounts Receivable Financing And Factoring!!

By Author: Tai Roylance
Total Articles: 300
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Accounts receivable factoring or AR is yet another financial tool. The money that is owed to a business is the business’s accounts receivable. For startup companies with little collateral for getting a traditional loan, AR factoring is a good idea .Also if your customers are slow payers, AR factoring can help to get you money quickly.
What is Factoring?
Factoring is the purchase of the accounts receivable of a business at a discount. Instead of waiting for up to 60 days in some cases, the factor (rep from the Invoice Factoring Company) purchases the invoice and advances most of the balance straightaway. The client first has to complete an application, which lists the receivables to be factored. The factoring company then gives a proposal to the client which includes an estimate of the factor fee. If the proposal is accepted by the client , the next step will be the due diligence. The factor researches not only the client but more importantly, the credit standing of the debtors. On completion of due diligence, the factor advances 70% -80% of the invoice balance to the client. Once the customer pays the invoice ...
... to the factor the client will receive the remaining balance minus the factor’s fee.

Reasons why companies Factor:
• Growth: A profitable, growing manufacturing company may find itself in a situation where it has used up all the credit lines the bank had given. A customer places a large order that needs to be filled soon. Unless the company comes up with the cash for production, it will have to forego the order to a competitor, which could also result in losing the customer forever. By factoring the current receivables financing is provided for filling the order thereby increasing company profits.
• Survival: Sometimes a Company’s cash flow is so tight that they need cash to fund payroll, pay taxes, and meet expenses. They simply cannot wait to receive payment from a customer 45 days later. In this case, factoring becomes an ongoing relationship.
Some other Benefits of Factoring:
• Elimination of bad debt – The non-recourse factor will assume the risk of bad debt, thus eliminating this expense from your income statement.
• Professional approach to collections – A good factor not only collects receivables in a professional way, but also eliminates overheads related to the collection process.
• Unlimited Capital – Invoice factoring is the only form of financing that grows with your sales. With increase in sales, more cash becomes available which enables you to always meet demand.
• No debt incurred – Since factoring is not a loan, you do not incur a debt. This helps you maintain a good-looking balance sheet.
• Factoring is easy and fast – The application needed to establish a factoring relationship is much simpler than other kinds of financing. No tax returns, financial statements, business plans, or projections are required.
• No personal guarantees – The repayment of the funding does not need to be guaranteed by the company principals. The company principals usually have to guarantee against fraud or disputes.
• Invoices are paid faster – It is normal practice for factors to report payment experiences to Dun & Bradstreet or other credit agencies. A debtor who is aware of this will not want his credit impaired.
• Credit screening – A factor will give you credit information on new customers, thus allowing you to make better credit decisions.
Accounts receivable factoring continues to be a popular financing tool and Businesses should take time to weigh the benefits of factoring to provide continued growth and stability.

Here the author tairoylance says a. Invoice Factoring and Accounts Receivable Factoring
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