subject: Accounts Receivable - Getting Cash For The Business Quick [print this page] Many Businesses are confused about using Accounts Receivable Factoring to fund your company's need for cash. Would you like to know what it is and how it works?
Using a factoring service allows your company to sell its unpaid invoices at a discount in exchange for immediate cash. The benefits can be freeing up cash, speeding up cash flow, reducing collection costs, being able to make purchases and pay your own suppliers sooner, and opening up some leeway to extend credit to your customers. The disadvantage is that you receive a discounted return on the invoice.
Here is how it might work
You just made your biggest deal ever, but the terms of the sale were 90 days same as cash. What are you going to do for cash for the next 89 days until you get paid? If you sell the account receivable to a factoring service, you will get paid an advance, usually about 80-90%, right away. At the end of the payment period when the debtor settles the amount he owed, the factoring service pays your company the remaining reserve of 10% minus their fee.
The factoring service is a finance company or bank that assumes the risk for the unpaid invoices. The main benefit to your company is that you can keep your cash flow going while the debt is waiting to be paid.
Avoid confusion
Factoring is not the same as a loan.
With factoring, you sell your accounts receivable to the factor. The factor assumes the risk. Three entities are involved: your company that is owed money, the factor, and the customer who owes the debt. When you sell your accounts receivable, you transfer ownership of the receivables to the factor who assumes the billing and collection responsibilities.
With a loan, your accounts receivable are used as collateral. Your company retains the risk of failing to collect. Two entities are involved: your company and the financial institution that's making the loan. Your company will still be responsible for billing and debt collection. If you want cash, not loan payments, consider if factoring is right for you.Accounts receivable credit lines work by you pledging to sell your invoices or receivables to a "factor" at a small discount, the invoices to your customers for accounts receivable can then be exchanged into a type of "credit line" for immediate cash usage.
This is very handy for businesses that need working capital and don't have the time to wait for their paying customers to pay their net term invoices. In addition, you are offered flexibility since you're only borrowing what you only need.
A number of banks offer credit lines as part of their accounts receivable financing package. Usually credit lines are matched with the size of businesses the factor desires to attract.
The factor may not find all accounts receivable that you want to sell as the owner of your business. First off, your clientele has to have a good credit history so as to assure the factor that customers are able to pay the current invoice. Cash advances widely vary.
Worth noting is the fact having such a credit line doesn't show up on paper as a liability. Factoring isn't a loan, which isn't a debt and thus doesn't affect your other financial statements.
