Accounts Receivable Factoring When Your Business Needs Quick Cash
Accounts receivable factoring is a great way for your business to get quick cash. Cash that can be used in an emergency, equipment replacement, or for quick growth. If your business sees a need to grow very fast but the bank won't lend you the money, factoring is the best route to take. It can get you the cash you need sometimes in as fast as 24 hours.
The idea of accounts receivable factoring is pretty simple. A company, called a factor, buys all or some of your accounts receivable invoices from you and pays you a percentage of what they're worth. The percentage is usually between 70-90%, and most companies will offer upwards of 97% if you are planning on factoring for multiple months. Other factor companies can act as a collection agency for you to get payment on troubled accounts. The factor company assumes the risk of the invoices that your company sells to them.
Let's look a little deeper at accounts receivable factoring.
When to use Accounts Receivable Factoring
Accounts receivable factoring is a helpful tool to get your company through a tough financial time. Restaurants that have seasonal swings often have trouble making it through the slow months, so factoring would be a good resource for cash. If an upswing in sales can be predicted factoring is an even better option.
A business with poor credit also benefits from factoring since credit checks usually aren't involved with the transaction. The factor is paying you based on future income, rather than your past credit history. Many companies use factoring as a last resort for cash.
The best time to use accounts receivable factoring is when your business needs money fast to take advantage of a new opportunity. Money will be delivered much faster than a bank can approve a loan, and incredibly faster than waiting for outstanding invoices to be paid.
The Risks Of Factoring
Invoice factoring may seem like a great idea for getting cash for your business, but it has it's drawbacks. Keep in mind that factors aren't regulated like banks are. They all operate with different terms and conditions and using the wrong one can prove very costly. Spend a good amount of time doing research on each company online to see what each offers and charges. As I said above, the payment is usually between 70-90% and they add a few of their own fees into the mix as well. A few hours of research can earn you 10% or 15% extra cash by finding the right company.
Long term factoring is also an option that most factors offer. Obviously, if this the only way your company can get the money it needs, do it. Pay attention to the recurring monthly factoring fee. It's usually around 5% and over the course of a year, you will end up paying significantly more than you normally would in bank interest.
If you need to free up the capital tied in your inventory fast, factoring is the way to go. Be sure to heavily weight its pros and cons before signing up.
More Finance Hubs by The Empire
- Merchant Cash Advances - Are They Right For Your Bus...
The merchant cash advance industry has thrived during this economic downturn. Companies hit dry spells and need a quick influx of cash. Crappy economy or not, equipment still breaks, roofs still leak, and...
- Tax Relief Attorneys - What Do They Do?
Put simply, you pay a tax attorney to deal with the IRS so you don't have to. They know the tax laws and can negotiate with the IRS for you. If you find yourself in tax trouble, such as owing back taxes or...
- IRS Debt Relief - What Are Your Tax Debt Options?
Being in debt to the IRS is a rough situation. It may even not be your fault, but nonetheless you you the IRS some money. There are lots of ways to find relief from the taxman and we will outline a few of...
- Reduce IRS Debt - What Are Your Options?
You owe back taxes. That's rough, but it isn't the end of the world. You have lots of options to reduce the amount that you owe, especially if this is the first time you're in debt to taxman. There are...
More by this Author
Title loans are risky business, and are normally a bad choice. However, people still use them, so it's important to discuss how they should be used, and what to watch out for when applying for them. In case you don't...
Learning how to get rid of slugs and get rid of earwigs at the same time is easy. Earwigs and slugs are two of the most common garden pests. They can go unnoticeable in small amounts, but when there are a lot...
Finding the best acne body wash is easy and will help you clear your skin. Body acne, bacne, or whatever you want to call it is embarrassing. Find the best body wash for you right here!