How Do Businesses Use Accounts Receivable Factoring?

How factoring can be used as a financing tool for your business.

As cash flow issues or working capital restrictions can come from many different sources depending on the business this will help you understand a few different ways in which business are using accounts receivable factoring to help resolve the issue in certain situations.

Specifically how factoring can be used to restructure debt, finance acquisitions, stabilize a seasonal business, and/or keep a start-up or fast-growing business expanding.

Uses of Factoring

Restructure debt

This is a fairly straightforward process of taking some or all of your outstanding loan debt and paying it off using the cash provided by the factor. You can consolidate several loans into one structure paid back by the cash flow you receive from your accounts receivable invoices. This benefits you in the following ways: It removes debt from your books, improves  business credit profile and puts you in a better position to meet your monthly expenses.

Finance acquisitions

This type of factor financing actually works more like an equity capital investment. Your business may be highly leveraged already and the banks are not willing to finance an acquisition. A factoring company accepts the value of your future collection of the accounts receivables as collateral and you get the cash you need to make your purchase. Many times these opportunities come and go quickly so you need to have fast access to cash to get the deal done. Bank loans can require cutting through red tape which slows you down when you need to act fast to make a deal happen.

Stabilize a seasonal business

Apparel manufacturers/retailers and other seasonal businesses sell most of their inventory during high sales periods and experience sluggish sales during other times of the year. They need to even out their cash flow to purchase inventory or materials during the slow seasons. Then, they produce the goods that will be sold in the peak seasons. Accounts receivable factoring helps you accomplish cash flow consistency during every season so you can prepare for the major sales seasons.

Keep rapid-growth businesses expanding

Start up and other businesses in a rapid-growth stage may be developing products that they are shipping and delivering, or they may be providing services, but they will not receive payment for 30-90 days. It's obvious from unfulfilled orders or outstanding accounts receivable invoices that there is demand for their product or service. To continue their accelerated growth, these companies need to restock inventory and pay staffers to meet the demand and they need to do so before the invoices will be paid. If they wait, they risk derailing the rapid growth of the business.

Accounts receivable factoring can solve a wide array of business problems, feel free to reach out to the team if you have any questions.