What is Factoring, AKA Accounts Receivable Financing?
Factoring - also known as invoice financing or accounts receivable financing - is the sale of a company's accounts receivable to obtain immediate cash.
The definition of cash on hand is simple: it’s the total amount of any accessible cash. It allows businesses to pay for standard operating costs like your rent or mortgage, payroll, monthly utility bills, etc. Your cash on hand also determines what projects your business can take on, or which financial hardships can be absorbed without taking on additional debt.
But what happens when you don’t have enough cash on hand to operate your business? One option that is quick, easy, and flexible is accounts receivable financing, or factoring as it is sometimes called.
Understanding Accounts Receivable Financing
Nearly every business has contracts with vendors to purchase supplies, materials for production, etc. This side of your ledger is known as your accounts payable. However, the receivable side of your ledger may be a gold-mine if you take advantage of invoice factoring, also known as accounts receivable financing.
Accounts receivable financing is one of the oldest forms of business financing and one that is accessible to nearly every business with a client base. One of the greatest benefits of this type of financing is you are not going into debt to get the cash you need. The process of accounts receivable financing, or factoring is fairly simple: Business owners sell their invoices to a factoring company. The factoring company purchases your receivables at a discount and you get cash before the invoice is paid by the customer. Basically, you’re exchanging the risk and time necessary to collect on invoices in return for getting a quick infusion of cash flow into your business. Once you’ve factored the invoice, the factoring company will then collect the payments due on those invoices since you’ve transferred the “ownership” of the payment to them.
Cash Flow Benefits Created by Factoring
If you’re like most business owners, you have contracts with your customers allowing them to pay over time. This time frame can be as short as 15 days or as long as 90 days, and in some cases may be even longer. While giving customers time to pay may increase your sales, you could also face cash flow problems as a result of offering this benefit. Many businesses are surprised to learn they are eligible to take advantage of this unique method of financing to increase their cash flow. Some industries include:
- Staffing Agencies – staffing agencies have to pay the people put out on assignment, continue marketing campaigns, and pay regular expenses like office rent and utilities. This can be challenging since your business model works like no other; you place staff members and once they’ve started working, you invoice your customer. This type of billing model can create a cash flow gap causing your income statement to be awash in red ink. Fortunately, it doesn’t have to be this way; your invoices can be partially paid within days of issuing them ensuring you have the working capital you need to continue your daily operations.
- Distribution – distribution companies need a strong, stable source of cash to keep supply chains moving. Acquiring products and making shipments can be challenging if distributors don't receive timely payments from their customers. Factoring your invoices can help accelerate your cash flow and ensure that the goods keep coming in and keep going out.
- Manufacturing – this is a cash-intensive business. You need cash on hand to purchase new materials to ship out your orders. If you’re like most manufacturing companies, you offer your customers terms; therefore, the gap between purchasing material and getting paid is significant. Using a factor allows access to much-needed cash and keeps your business operations funded.
Customized Solutions to Meet Your Needs
We understand every business has unique needs and there is no one-size-fits-all solution to your funding needs. Business owners all need cash flow to keep their day-to-day operations functioning. Accounts receivable financing is specifically designed to help you better manage your cash flow without harming your credit.
If you’re ready to improve your cash flow with accounts receivable financing, contact us at (248) 658-1100 or [email protected].