Accounts Receivable Factoring Differs From Traditional Financing

Accounts receivable factoring is a practice where acompany sells its accounts receivable

invoices to a third party at a discounted rate in exchange for immediate cash. This method is used by businesses to cover short-term cash needs during. One important difference is that It's not the business' credit that's up for review, but rather it is the party named on the invoice, or the debtor's credit, and there's also nothing to repay. Factoring is experiencing a resurgence in popularity as many small businesses are still struggling in the current financial climate. A bank loan is based on your assets and the ability to pay the loan back. But when you factor, the funds available are based on your credit-worthy customers and are virtually unlimited.

The primary difference between a bank loan and accounts receivable factoring is that factoring is not actually a loan. There is no lengthy approval process, it is not dependent on personal credit, there are no tax records, no financial statements and the funding you are able to get is unlimited.

The difference is that when banks process an application for a loan, they are usually look at what are commonly known as the five "C's" -- including cash flow, capital, character, conditions and collateral. Banks want to know that you will be able to repay the money that you borrow, whether you have assets as an alternative way of repaying the loan, whether you have enough equity in relation to the debt or whether you have the education and experience to successfully repay the loan and the current economic reality of your industry (condition). If the bank feels your application is deficient in any of these categories, they can deny it.

Potential borrowers often do not determine and approach the best lender for their market and business, nor do they have a clear goal or plan to present to the lender so that they understand what you will be using the money for. Often times, banks deny loans because of a lack of planning and research. Of course there are always some other factors such as any previous late payments and credit card debt or defaults, all of which can contribute to rejected loan applications.

So when it comes to factoring, you are able to side step this lengthy process of application and examination of your assets. The only asset that factoring companies are interested in is your accounts receivable invoices, so your personal credit is not important - it's your clients' credit that is up for inspection. How you plan to use the funds you receive is up to you and previous financial missteps will not be held against you. For businesses that want a quick influx of cash without jumping through hoops, factoring is ideal.

by: Kristin Gabriel

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