Examining How Accounts Receivable Factoring Works, Improving Cash Flow
Several companies face cash flow problems during the startup stage, especially in today’s economic environment. Then there are the others who don’t have the cash they require to grow their businesses.
Improving your cash flow in the year 2010 should be a main concern, as well as collection efforts or even getting professional help with financial forecasting. But there is one tactic that works every time: accounts receivable factoring.
When these alternatives aren’t sufficient, factoring can help. For any company strapped in cash, selling accounts receivables or invoices to advance funds is a sound and reasonable idea. After all, you could always use the money now (rather than waiting for 60-90 days) to buy supplies and keep the business running.
Like any other kind of financial assistance, factoring comes with a price – but this is small as compared to the one that you have to face in case of a loan. Factoring companies, as in any commercial financial institution, charges a fee for its services.
Here is how accounts receivable factoring operates: first, the factor, such as The Interface Financial Group (IFG) will want to assess your invoices and also check the creditworthiness of your customers. Then, you should be ready with these documents: current financial statement, accounts receivable aging report, certificate of incorporation or partnership agreement, proof of insurance, invoices and other relevant business documents.
Because it’s the factoring companies that will do the collections of the receivables, they want to protect themselves and ensure that the invoices will be paid on a timely fashion. Funds can be given to you in as little as 24 to 48 hours – basically after knowing which invoices will be sold.
For example, the factor might pay you 80% of the total amount of your invoices and then reimburse you the other 20% when your customers pay their invoices. They of course, shall subtract their professional fees.
The price of this type of financial option ranges anywhere between 3 and 7 percent of the total amount of the invoices. Factors’ fees differ depending on the size of your invoices, your customers’ creditworthiness and the number of days in your cycle – for example, 30, 60 or 90 days.
Accounts receivable factoring isn’t for everyone. Firstly, this alternative is limited to B2B organizations. Then, interest rates are almost always larger than those imposed by standard bank loans. But because factored invoices are just only at most a 90-day term, then the total interest paid shall come out to be smaller than the longer term of a bank loan.
