subject: Funds Available From Factoring Accounts Receivable [print this page] Accounts receivable often get extended from thirty days to forty-five, sixty or even ninety days from the date of the invoice before being paid. This creates a difficult cash flow crunch because the business has to pay bills within thirty days.
A business that is in a growth cycle has difficulty filling new orders when it is in a growth cycle. As a business grows with new orders, it has to collect accounts receivable in order to meet the demands of accounts payable. Otherwise, it must find alternative methods to finance the business. While it is exciting to watch a business grow in sales, it is difficult to finance new orders due to a lack of cash flow. Vigilance is imperative in managing accounts receivable so that clients are not late on payment. This can adversely effect the balance sheet of the business when trying to get a credit line at the bank. A careful eye has to be kept on the aging account receivable report.
Factors are willing to advance eighty percent of the original amount of an invoice, or even ninety percent in some cases An advance is made almost immediately after the invoice has been issued followed by the reserve amount minus a discount fee once their customer has paid the invoice. A business doing business with creditworthy customers is eligible for factoring as a debt-free line of credit. In fact, factors look more closely at the credit worthiness of their clients rather than the business that benefits as a result of factoring. It is considered a debt-free line of credit because it is a result of selling the invoice to the factor. An invoice becomes an asset that a factor can advance money against. A percentage of the invoice is determined by the type of industry the business is involved with.
One of the best features of factoring is that a factoring line of credit automatically grows as orders in the business increase. Thus, no need to apply for additional funds. Underwriting a factoring relationship is done more quickly. The process of application and acceptance is done conviently within twenty-four to forty-eight hours.
When the national economy is in the tank, it is of concern to businesses that their conventional line of credit not be decreased. When the realization of accounts receivable does not meet the operational needs of a business, it might well be to the advantage of the business to factor invoices.
When a business is involved in manufacturing or distribution, factoring purchase orders might also be to their advantage. This is particularly helpful when a company gets large orders. It is a little more difficult to get purchase order financing as it presents more risk to factors. However, under the right circumstances, it can still be very helpful in providing a business with positive cash flow. In order for a business to meet the demand of additional orders, it is necessary for a business to have adequate cash flow.
Many businesses only think of conventional loans from banks. However, banks have a tendency to tighten their credit requirements especially during economic downturns. The percentage of businesses that finance accounts receivable and purchase orders goes up when the banks tighten their credit policies. Thus, businesses need to think more in terms of utilizing paper assets when they are not able to get adequate conventional funding. It can be a totally liberating way of getting through a cash flow nightmare.
Factoring invoices has a great deal of flexibility. Not all of the invoices have to be factored. Seasonal businesses have surges in a yearly cycle when orders peak. In that case, they can factor invoices one month and perhaps not the next unless necessary. Factoring is a needs based way of financing in order to meet the operational demands of a business.
