subject: Factoring Account Receivables [print this page] Your accounts receivables provide you with the money you need to pay your invoices, order raw goods, and pay your employees. One way to acquire the money you need from your customers is to use factoring accounts receivables. Using factoring accounts receivable provides you with the money you need now in order to pay for other things to keep your business afloat. By doing so, you can take on larger orders that you may have rejected in the past.
When you have money from your invoices now, you will be able to strengthen your corporate credit as you do not have to wait on your customers to pay before you can pay your lenders. Here are some important things you need to know about factoring accounts receivables:
Advanced rate. Selling your invoices to a factoring company means you will be given an advanced rate for the invoices. Most companies opt to receive 70 to 80 percent of the invoice total up front and then wait for the rest of the funding once the factoring firm has acquired the rest of the money from the borrower.
Reserve. The reserve refers to the total amount of the invoices that are factored. The reserve is essentially the factoring fee you will pay the company for factoring your invoices. Usually this rate is about 5% of the factoring invoice total.
Letter of Intent. When you sell your invoices, to your customers will need to agree to a letter of intent with the factoring company. The letter of intent then provides information regarding the payment time frame.
Depending upon the way your customers have been able to pay their invoices, the factoring firm will make their decision as to whether or not your business is too risky to take on. The factoring firm needs to then make sure that your customers are going to pay the invoices and they will not work with people that have bad credit or a history of slow payments/late payments.
If you have high risk clients and customers, the factoring firm may require another type of collateral to secure the loan. They will ask you for more than your accounts receivables. Generally they need the title to a piece of real estate, property, machinery, etc. Carefully consider the collateral you are planning to use to secure the loan as it can put your personal finances at risk if you default on the loan.
