Need immediate access to cash for expansion or working capital? Accounts Receivable Factoring provides just that—knowing the advantages and considerations are key to leveraging your B2B invoices.

Accounts Receivable Factoring enables business owners to receive payment for completed work or delivered services immediately upon invoicing the customer rather than waiting 30+ days for the customer payment to be received.  An Accounts Receivable Lender, or Factor, is a third-party firm which provides funding in two ways – by lending against a business’ accounts receivable or by purchasing it and providing cash based on unpaid invoices.

Accounts Receivable Factoring is a form of financing used by a growing number of B2B companies to stabilize and accelerate cash flow.  An AR Facility can provide predictable working capital, enable expansion, and can improve payables cycle, often resulting in vendor early payment discounts and preferred pricing.

The 5 Advantages with AR Facility

There are 5 main advantages to utilizing Accounts Receivable Factoring to get funding:

1.       Accelerates your cash flow providing immediate (many times next day) access to capital for goods and services you delivered as opposed to 30, 60 or 90 days from the time of an invoice. 

2.       Great for growing businesses. Provides immediate cash flow for growth; expand sales and marketing, add products and inventory, or additional production and service staffing.

3.       Your Accounts Receivable is the collateral. Unlike traditional bank loans, factoring doesn’t typically require you to pledge other business or personal assets as security.

4.       Greater availability of capital. An AR Facility will typically advance up to 85% or more of your invoice amount, as your business grows so can your total availability.

5.       Expense Savings and Enhanced Customer Qualification.  Partnering with a Factoring company can save your Credit and Collections department’s time and effort. This can have the effect of lowering your operating expenses.  In addition, most Factoring relationships include in-depth credit review of any new business you may be looking to work with.

Factoring Considerations

An old and out of date perception.  Generally unknown and misunderstood by business owners is that with an AR Facility customers are notified when a factor takes receivables over. The customers are no longer paying you direct, they’re paying the factoring company on your behalf.  The misperception is that this is a potential sign of financial weakness rather than an accepted and wide-spread business finance tool.  Communicating to your customer base on this change and the value to your company can be very helpful in dispelling this misconception.

Enhanced decision making capability.  Once you establish an AR Facility, you will be utilizing their internal credit department in order to credit qualify your customers.  For example, your factor could limit your ability to do business with a customer(s) based on their credit history or rating.  Typically, the Factor would make these receivables ineligible, meaning they cannot be advanced against, but ultimately you can make your own informed decision as to working with that customer.  The positive part of having someone credit qualify your customers allows you the ultimate insight into whether a customer should be allowed to pay on terms or not.

Expense.  Accelerating your receivables can offer significant benefit, but there is a cost. Factoring expense typically include the factor’s fees between 0.5% and 3% of a receivable plus interest on the capital advance, typically at prime rate plus 2% or more percent annual.  In the case of the purchase of invoices the face value is discounted at purchase.  The good news is that fees and interest typically only apply for the term or time period the invoices are outstanding keeping the actual expense for the use of the funds both acceptable and easily calculated.  Measuring your return on investment (ROI) based on use of the capital; expansion, better buying power, enhanced product offering, stabilize working capital, etc., can and should be assessed against the finance expanse.

How to choose the right company to provide your AR Facility?

First, not all Factors work with all B2B businesses, some have very narrow niche markets they focus on so knowing which lender to approach is key.  Also there are varying forms of factoring including recourse and non-recourse with each company having their own terms, term of contract, conditions and pricing.  Also, there are many Factors in the market, so plan on devoting some time to research and discussions with potential lenders that look like they may be a fit for your business and needs.

Alternately, Capital Partners Network can help, providing you the experience and expertise to help better identify your particular requirements and matching your business with the right lender.

If you currently allow clients to pay on terms and are constantly worrying about cash flow for your business, you should consider an AR Facility.  Accelerating your client payments for working capital, business growth, or paying down your payables are all reasons you need to consider an AR Facility.