Accounts receivable factoring, or invoice factoring creates positive cash flow and can allow the business to expand without incurring debt or to access operating cash when traditional bank funding is hard to find. Accounts receivable factoring is not a loan, but a discounted purchase. Here’s how it works. The business sells its invoices to an accounts receivable factor for 95 to 99% of their face value. The factor pays the business immediate cash and the business does not have to wait 30, 60 or even 90 days to collect the payments. Also, the factoring firm normally takes on the risk of servicing and collecting the outstanding accounts receivable payments. A business that has consistent cash flow during an economic slowdown will be able to survive and stimulate economic recovery. They will be able to fund or even expand their marketing budget, buy more raw materials, better their operations, strengthen their profits, purchase supplies, retain their employees and meet financial obligations on time. This cash flow not only gives them a competitive advantage over those waiting to collect on their invoices, but it also strengthens the economy as they can reinvest the cash into their business.
Other Benefits of Accounts Receivable Factoring
- The amount of the payment received from a factor is only limited by the amount of your account receivables
- The approval process is less cumbersome than a bank loan as factoring firms are concerned about the amount of your accounts receivable and the payment history of your buyers
- Access to cash is much faster than bank loans
- Removes risk of write-offs or uncollected invoices
- Eliminates time-consuming process of collecting invoice payments
Types of Businesses that Can Benefit from Accounts Receivable Factoring
Accounts receivable factoring works well for companies with up to 100's of millions of dollars in annual sales, but any business can benefit from it. Here are some of the businesses that can effectively use factoring to create immediate cash flow.