Common Q & A About Factoring Accounts Receivable

When a company submits business to business or business to government invoices, is "cash poor" or has cash flow problems, and is unable to qualify for a business line of credit, factoring might be the answer. Factoring is a type of financing where businesses sell their accounts receivable (invoices) to companies known as factors. Factoring is a financial tool to help businesses solve cash flow problems. It is neither a debt nor equity financing. It is the sale of an asset. Accounts receivable are business assets.

What are some of the ways factoring can benefit a business?

Get current on accounts payable
Getting discounts from early-pay incentives
 Pay off taxes or meet payroll
 To have an amount of cash that grows automatically as the business grows
Improving the balance sheet by showing more liquidity
 Retaining and maintaining control and ownership of the company
Qualify for less expensive conventional loans
 Improve the company credit rating
Make payments on time to avoid late fees and a decrease in credit
 Increase sales and production
Provide products and/or services as a result of being able to concentrate on what the company does best
 Being able to accept additional sales or contracts

How does the cost of factoring compare with other ways of financing?

It can be cost-effective to factor when a company leverages all of the advantages.

 Knowing the typical amount of time it takes for certain clients to pay on their accounts. If a client typically pays invoices on fifty days, the company might benefit from factoring and reduce the per diem cost by factoring from day number thirty.

A two-ten-net-thirty scenario can be a way of taking advantage of discounts offered when paying suppliers early.

Sometimes the prices have to be increased in order to cover the cost of doing business.

It is possible in most cases to save money by purchasing larger volumes of product

Companies can offset part of the cost of factoring by discontinuing early-pay discounts such as two-ten-net-thirty days.

 A fee associated with factoring is quite competitive with other options when considering extraneous fees. There are no application fees, no service charges, no escrows to maintain and no requirement to offer all of the company assets for collateral.

 A company is not required to finance all of the invoices. If the company has the ability to finance for the first thirty days, it may consider factoring only the invoices past thirty days.

A company is not required to factor all of the invoices. A company can chose what invoices it wants to factor.

What Companies benefit from factoring?

Temporary staffing companies
 Distributors
Security systems
Trucking
 Transportation
Insulation companies
Distribution
 Defense Contractors
 Communications
 Food
 Computer Hardware/Software
Distribution

Other features of factoring:

Will there be a strained relationship between the company and client when factoring invoices? The last thing a factor wants is a strained relationship between a company and its clients. The factor lets the company know the status of payment so the company rather than the factoring company contacts the business about payment.

Factoring companies specialize in managing accounts receivable. The do factoring all around the world. The factor will always let the company know who is and who is not paying.

It is important for companies to have a perspective on their cash flow and accounts receivable. When there are cash flow problems and a lack of qualifications to acquire conventional funding, it is wise to look at alternative financing. Several Fortune-500 companies have found factoring as a time-sensitive solution to getting cash to flow.

If you have a company in similar circumstances, consider talking to a factoring broker. He may very well be able to find the right fit for your cash flow needs.