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Benefits of Accounts Receivable Factoring to Small Business

By Kristin Gabriel

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Published: 12Mar2010
Word count: 520
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If you run a small business, then you know how a "use it as you need it" funding option can be very effective during tough economic times like we have been experiencing lately.

The funding option that fits this bill is accounts receivable factoring, defined as the selling of outstanding invoices or receivables at a discount to a finance or factoring company that assumes the risk on the receivables and provides quick cash to a business.

There are a number of benefits to accounts receivable factoring. You can pass off collections, for one thing. Outsourcing your accounts receivable management to another company frees up resources to focus on other more productive business activities. Entrepreneurs can free up their working capital: Many companies have the majority of capital tied up in their inventories. For example, accounts receivable factoring offers manufacturing companies a chance to free up capital that is tied up in their inventories. Invoice factoring is great for quick financing because it does not require a business plan or tax statements.

Factoring is a quick form of cash often used for businesses that are experiencing a cash crunch. Most small businesses could stay afloat if their clients paid invoices on time, so today's economy is causing business owners to rethink their operating strategies. Often firms don't get paid immediately for delivered products or services; however, in order to sustain and grow their business, they need some cash on hand. That's where single invoice factoring can benefit businesses, and especially those who do not get paid for 30, 60 or 90 days.

One of the oldest and most widely used forms of funding for businesses, standard receivables factoring has been around for thousands of years. There are a number of innovative solutions where companies can get short-term working capital to grow their businesses and improve cash flow. And if you are a small business, especially a start-up, you know how tough it can be to attract conventional funding.

Just so you know, factors typically don't expect to buy 100 percent of a client's receivables, so there are no minimum or maximum sales volume requirements. Each invoice purchase is a separate transaction and does not form part of a portfolio lending approach.

The transaction is modeled as a buy-sell transaction. It's a great way to turn receivables into cash. Each and every client's circumstances will vary and so this may have an impact on the fees charged. Here's how factoring works. First the factor undertakes a due diligence that often takes one to two business days. Once this step has been completed, the client is at liberty to offer invoices for purchase by the factoring company.

Upon receipt of the invoices, a factoring company checks the credit of each debtor named on the invoices you provide. Then they will make sure that the sale represented has been satisfactorily completed. Once this is done, the factor notifies the debtor of the purchase of the invoice, and the client gets their funding. At the end of the credit period the debtor will then pay the factor directly, completing the transaction.

Kristin Gabriel is a writer who works with The Interface Financial Group (IFG), North America's largest alternative funding source for small business. The company provides short-term financial resources includinginvoice factoring, serving clients in more than 30 industries in the United States, Canada, Australia and New Zealand. IFG offers expertise in factoring, accounting, finance, law, marketing and banking.

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