When you work with other businesses, your open invoices look good on a spreadsheet but don’t do anything for your immediate cash needs. Accounts receivable financing, also called factoring, is one way to make sure your cash flow is ready to meet your needs. Whether you are looking for a one-time cash infusion or you want to enter a longer agreement with a factoring company to maintain your cash flow, here are the details you need to know.
Whom Is Factoring For?
Accounts receivable financing used to only be for B2B businesses, but now nearly any business that works through invoices can benefit. So doctors’ offices, attorneys and other service industries where you invoice are potential factoring candidates.
Factoring is for companies that have cash-flow issues but are otherwise successful. Accounts receivable financing is not a loan, your business is selling its invoices for a percentage of their face value, so you are getting your cash up front, but not as much cash as you would get collecting the invoice on your own.
What Are the Benefits?
There are a couple of immediate benefits to factoring. First, the application process is quick and easy. Unlike a traditional loan that can take months, factoring involves a short application and relies more on your A/R aging report and verification that you have no outstanding liens. Your customers’ credit is more important than your own. First-time applications are usually vetted and funded within a week. For existing clients, cash can be deposited in your account within a day.
Over the long-term, factoring allows you to have a steady cash flow that means you’re building your credit with on-time payments. You also save money on collections. You don’t have to spend hours, or hire someone, to track down your open invoices. Your lender takes on all those responsibilities.
How Does It Change Your Business?
Factoring allows you to offer longer and better terms to your customers, up to 90-day terms in some cases. You’ll also have a steady stream of income that can get you through seasonal slumps. It can allow you to actually grow your business in the direction you want to take instead of focusing on bill payment and collections.
Lenders are usually not traditional banks. If you decide that accounts receivable financing might be right for you. Find a lender with good terms. Review the fine print before you sign an agreement. With some research, you can find a partner who helps your business thrive.