Accounts Receivable Factoring Might Be Your Secret Weapon in Business
The age-old practice of accounts receivable factoring has been around since the early explorers. A third-party lender provides capital in exchange for the sale of pending accounts receivable invoices plus a fee and interest. Accounts receivable financing is similar in nature to a loan without the same lengthy process. The pending invoices act as collateral. Factoring may be a great option for small businesses without a substantial reserve of cash.
Plan to show the lender the company’s financial history and health. The credit rating of the business is not as crucial as other forms of financing such as traditional business loans. Finding a lender specializing in both your industry and accounts receivable financing is ideal. Someone who understands how your business operates can tailor a favorable lending policy.
Factoring can offer businesses a faster way to obtain necessary capital. Conventional loans are dependent on credit worthiness, whereas factoring is dependent on your customers and their credit. Factors like businesses want the customers who pay promptly. Not all terms and conditions can be negotiated but quite a few are. Things such as the volume and average size of invoices, the history of customers past payments and the average length of time for payment can generally be negotiated between you and the lender.
Depending on the lender, there are two different options for accounts receivable financing. Recourse factoring you to reimburse the lender if the customer fails to pay. The lender buys the accounts receivable invoices at a discount. If you have prompt customers, this may be a good option for you. The other option is full service factoring where the lender has all the control and responsibility of collecting the debt. All the risk is on the factor and they purchase accounts receivable invoices at a higher discount because of that.
Between what is negotiable and what is not, there are lots of things to consider if looking into this type of business financing. There are many third-party factoring companies, but they are not all the same. Be sure to research the different companies to ensure they are the right fit for you and your business.
Beyond third-party factors, many banks offer accounts receivable financing to customers. If you are a loyal customer of a particular bank, it may be a good idea to see if they offer the service. Another thing to consider during your research is other companies in your industry. Friends and colleagues may offer advice on lenders they have used.