Small businesses are encouraged to grow but are often not given the same financing opportunities as larger corporations. For example, when it comes to business loans. It is much easier for a large established business entity to get financing. One option that a business can utilize to help raise capital is by considering accounts receivable financing.
This type of financing is where a company uses their accounts receivables to generate the cash they are in current need of. It is often called factoring. The company will sell their accounts receivable to a financing company that specializes in buying accounts receivable. The sale of the accounts will be at a discounted amount of what is owed on the invoice.
The Factoring Process
There is a process that the business entity goes through to utilize invoice factoring. First of all the business has to choose one of the companies that provides factoring services. There are financial companies that are willing to give money to the businesses who have accounts receivables. There is a format that is used for this. Then the company goes about its business and generates its accounts receivable. This now becomes money owed to the company for services/products rendered.
The business decides on how much money they want to obtain in respect to the value of the accounts receivables. For example, a business may be owed $5,000 in their accounts receivables. They can take these accounts receivables to a service who will give them perhaps 80% of the value of the invoices. So, in this case, the business would receive $4,500 (80%) in cash for these accounts receivables. The factoring company will then collect the full value of these accounts receiveables that they have now taken charge of.
When the factoring company has collected the full amount of the accounts receivables they will pay the balance owed for them to the business. In this case it would be $500. However, there is a fee that has to be paid to the company for the services they have provided. Which is the advancement of the money and the process of collecting the receivables. The process is basically the same for all of the companies offering factoring accounts receiveables services. There will be differences in how much they advance, the criteria for qualifiying and the amount they will charge for their services.
Great Reasons for Factoring
It can be difficult and a concern for a business to use their accounts receivables for factoring. The business looks at this as money coming in and to have to lose any of it seems like they are eating into their profits. It does mean that they are not getting the full value of the accounts receivables because there is a fee to be paid for the factoring. But, the benefits of obtaining funds though factoring can far outweigh the costs.
When a company is in need of cash flow there is an urgency to this. Trying to get the needed money through traditional methods can be time-consuming. This often is not time that the company in need of money has. In most cases the required money can be obtained from the factoring of accounts receivable within a twenty-four hour period.
🤷♂️ Less Hassle
Trying to obtain money through short term loans can come with a lot of hassles. It can often mean the business in need of the money can’t qualify. This makes it difficult to find the money quickly.
💰 Less Cost
In many cases the fees paid for the factoring of accounts receiveables will be far less than what the interest would be on a short term loan that was taken out for the same amount. This can make a big difference in the overall profit margins.
👍 Breathing Room
Many times the money that is needed from the factoring of the accounts receivables is needed for payroll or for the purchase of materials so more product can be generated. By being able to utilize the funds owed from the accounts receivable it means that the company is not experiencing any downtime. If needed for payroll it means that production is not going to come to a halt because of a shortage of workers.
Solution for Cash Flow Issues
A lot of new businesses face cash flow issues when first getting started. It can be difficult to get financing to help with this. But accounts receivable financing is easier to obtain and works well for starter businesses who have funds coming in but can’t wait for the normal terms of the accounts receivable. Factoring can be done as needed until the company becomes strong enough that it no longer needs help with cash flow.
Small companies often have staff that they need to pay who are not going to wait for the long term of the accounts receivables to flow in. Companies can use factoring financing to cover their payroll. Some businesses need to buy ongoing supplies to keep production going. They cannot shut down production lines while they are waiting for funds to come in from the accounts receivable. A better solution is to use the accounts receivable for funding. Factoring financing is a useful resource for the new business to get the funds they need to keep their business going until it builds up a cash flow that can carry it.
Five Companies Offering Accounts Receivable Financing
Becoming a business owner means quickly learning what resources are available to the business when it is in need of financing. One of these resources is institutions that offer accounts receivable financing also known as factoring.
Commercial Capital LLC: This is a company that offers factoring for not only the United States but other countries as well. Commercial Capital has been offering this type of financing solution for over ten years and has assisted a variety of different companies with their short-term financial needs. They don’t use gimmicks to sell their services.
Universal Funding Corporation: As a funding corporation, this company has been offering their services since 1995. They state that they offer competitive rates and that they welcome new startup companies. They are flexible in the type of business they will offer their services to. Their mandate is to offer the highest funding rate within the shortest period of time possible striving to make this within a twenty-four hour period.
Riviera Finance: This factoring company is on par with their competitors when it comes to competitive rates and a speedy turnaround time. They do not implement any minimums. They have been in business since 1969 and they will also accept delinquent receivables.
American Receivables: One of the drawing features of this company is the fact they have been business for many years. They are competitive and are well known for their top quality customer support.
Paragon Financial Group: For businesses that need factoring for a large volume of accounts receivables, Paragon Financial Group may be a good choice. Their monthly factoring ranges from $25,000 to $3 million a month. Their focus is on those businesses that are dealing with tax issues.
These are just five of several well-established and highly recognized accounts receivables funding financial establishments.