Accounts receivable financing is a process by which your company sells some or all of its commercial invoices to a factoring company at less than face value, in exchange for a quick infusion of cash which can be used for any business purpose. With factoring, businesses can get an advance on invoices as soon as the buyer agrees to pay. So instead of waiting 30, 60, 90 or even 120 days for customer payment, factoring provides cash immediately.
Fast infusion of cash
The immediacy and seasonality of business requirements is such that term loans are simply unsuitable to satisfy some liquidity needs. Expenses such as payroll, inventory purchases, manufacturing inputs and business expansion all require prompt and responsive action. Accounts receivable financing can be setup in less than a week. Ongoing transactions can occur within a day or two, to keep a steady cash flow to support your business.
Unlike term financing, business owners retain the flexibility to choose the timing and amount of accounts receivable financing. When cash flow is adequate, you can retain your receivables and wait for customers to pay on regular terms. When cash flow is tight, you can sell the amount of receivables required to cover upcoming expenses. You may pay a receivables management fee, but that is generally far less than paying monthly principal and interest on a loan.
Collateral is unnecessary
If you apply for a conventional bank loan, you’ll usually have to provide some form of collateral as security for the lender. In accounts receivable financing, the invoices themselves are the collateral, so there is no need to provide any other form to a factoring company. This means that no business assets are not jeopardized, and your personal assets are not exposed either.
You retain business ownership
When a company has critical need of financing, one of the ways it can raise cash is to sell equity in the business, and while that may be effective, it relinquishes some degree of control in your business. When you arrange for accounts receivable financing, you retain complete control of your business, because no other investors are ever involved.
Issues to consider
The factoring company purchases the receivables at a discount the receivable’s face value. The discount is essentially the cost of getting paid early and is comparable to the cost of offering standard early payment terms directly to your customers.
In most cases, your customer will be notified by the factoring company to direct payments to the factoring company. However, most companies are familiar with this process and can handle such requests easily.
Accounts receivables must be free and clear of any liens so that the factoring company can buy the receivables outright. If your receivables are subject to a blanket lien from another lender, that lender will need to carve the receivables out of their lien. Most lenders are familiar with this process.