Are you a business in need of working capital to fund expansion or pay bills? A growing cash flow solution is factoring or, selling invoices with AR Factoring.
How Factoring Works
So let’s face it. Cash flow is everything. You can have all the business in the world but until such time as your customer actually pays for the goods or services, you are stuck.
In a cash flow bind, many businesses are faced with two vastly different choices. The first is to go to a bank and try to get a loan.
Although bank loans are sometimes a good option, they can take a long time and be difficult to get approved. They will look closely at your financials and are most likely going to want some sort of collateral. To make matters worse, a loan is just more debt that your company has to endure.
The second option, but often the best for many businesses, is selling invoices with AR funding. The process is called “Factoring” and it has helped countless companies manage cash flow and fund growth.
Once you present an invoice for sale the funding company will verify it and fund an advance. Ranging from 80-90%, the advance is basically a down payment on the invoice. Once the debtor pays, the balance is wired into your account less the factor’s discount fee.
Seven Benefits to AR Funding
Although there are numerous benefits to factoring, here are seven that you might want to pay attention to:
1. Cash Without Debt
Unlike banks, factoring is not a loan; it is simply the selling of an existing invoice. That means no additional debt to cloud up your balance sheet.
2. Streamlined Process
Unlike like loans, setting up an account to factor invoices is not a long drawn out mess. Initial setup averages 5-10 days and funding happens within 24-48 hours on approved invoices.
3. Increase Profits
With good planning it’s possible to either save or make money far in excess of the factoring costs. Take advantage of early payment discounts, negotiate bulk discounts from suppliers, increase inventory for large orders, or add the staff and overhead required to fund expansion.
4. Credit Is Not Key
You may have a new business or one that has been struggling a bit lately. Factors understand that having cash on hand can be the difference between growth and keeping your doors open. For the most part, your “credit” rating does not come into play. What does matter is the strength of your customer paying the invoice.
5. Keep Control
No one tells you what to do with your money and no one runs your business like you. When you sell a receivable and receive some immediate cash, you decide how to spend it. Pay bills, expand your business, or buy more equipment. No one is looking over your shoulder. You do what you think helps most, because you’re the boss!
There are no long term contracts, minimums, or maximums with many of today’s factoring programs. You can choose the invoices you want to factor. Having a good month? Only factor what you need. Experiencing a tough time of the year? Factor a few more invoices for the extra cash you need.
7. Extend Terms Confidently
Take advantage of professional receivable management services. Factors can help underwrite a new customer, skillfully handle paperwork, and improve timely receipt of payments to save time and reduce bad debt.
The list of benefits go on but it all comes back to Speed, Flexibility, and Improved Cash Flow.
No matter what you have heard, or what your financial friends may have told you, you need to explore all options when it is your business on the line. If you are like most companies, you may find that Factoring is the smartest business decision you have ever made.
Steps For Selling Invoices
If you are considering accounts receivable factoring it helps to understand the application and approval process before submitting invoices to a factoring company.
Step 1 – Factoring Application
The first contact often starts with a telephone call or online inquiry. It allows both you and the factoring company get to know each others business model. If your customer base and volume sound like a good match it will lead to a formal application. The written application differs by factor but most will ask for information similar to this Sample Factoring Application (click the link to download in PDF format).
Step 2 – Supporting Documentation
You will need to gather supporting documentation as requested by the factoring company so the application can be underwritten. This usually includes:
- Accounts Receivable Aging Reports
- Evidence of Legal Business Entity
- Copy of Prior Year’s Tax Return
- Sample Invoice
Step 3 – Review and Approval Process
Since factoring is the purchase of receivables rather than a loan, the approval relies heavily on the strength of your customers. The factor will evaluate the creditworthiness of each invoice debtor and establish credit limits on a per customer basis before you can sell your invoices with AR Factoring.
A public records search will be performed on your company to verify there is clear title to the accounts receivable. This search can include current corporate status, judgments, liens, UCC, pending litigation, IRS back taxes, criminal records, and any other items that might interfere with receiving payment on the invoices.
This underwriting or due diligence process takes an average of 5-7 days on new accounts. A written factoring agreement will be provided outlining the terms, advance rates, fees, and recourse provisions.
Once the approval process is complete it can take as little as 24-48 hours to receive cash for invoices. When you see ads for same day or next day funding just know they are really talking about existing accounts where both the company and their customers have already been approved.