What is Accounts Receivable Factoring?

Cash flow problems often occur at the early stages of business development or during periods of rapid growth.
Cash flow especially becomes a problem in industries where it’s typical for completed work to go unpaid for 30, 60, or even 90 days after issuing the invoice. Thus, when growing companies start experiencing growth pains, they first try to apply for small business loans.
However, conventional borrowing increases business expenses and normally requires additional collateral. Some companies, especially smaller ones, are turned down by banks because of loan underwriting criteria. Some companies will also explore the option of equity financing, but this form of funding is generally harder to find than debt financing. And once found, it takes longer to arrange.

The Accounts Receivable Factoring Solution…

Accounts receivable factoring, on the other hand, is a viable funding option for companies experiencing cash flow challenges. In a nutshell, factoring is the process of converting the accounts receivable of a business into cash by selling outstanding invoices to a ‘factor’ for a discount.
With factoring, instead of depending on the applicant’s financial statements, the factoring company focuses on the strength of the client’s accounts receivable. In other words, because factoring companies are paid by the applicant’s customers (account debtors), factors are most concerned with the creditworthiness of the applicant’s customers. If the applicant’s company has a product or service that it provides to a creditworthy customer, then the business is a good candidate for invoice factoring.
It’s important to note that invoice funding does not create debt or require additional collateral. It is very simple to use. What could take weeks or months to be approved for funding from a more traditional lender, takes 3-5 business days in the world of factoring. Cash advances from 80% of the invoiced amount, depending on the customers and the business volume, can normally be obtained in 24 hours or less on an ongoing basis. In addition, funding occurs as long as a business has outstanding invoices and needs more cash, and as long as the business is selling to credit-worthy account debtors.
Maintaining a healthy cash flow via accounts receivable factoring provides a growing business with the working capital it needs to pay salaries, reduce debt, improve vendor relations and focus on critical success factors-operations, sales and growth.

Pawning for Payroll? Try Factoring Invoices Instead!

Many pawnshops are reporting that over half their customers are now small business owners that are basically pawning to meet payroll.
Lured by the high price of gold and ease of credit, they are bringing in everything from engagement rings to high end watches for a quick cash infusion
While selling the gold is one option, using a pawnshop allows the business owner to utilize the assets as security for a loan. If the loan isn’t repaid within the specified time frame, generally 30 to 60 days, the pawnbroker keeps the items.
The advantage is fast cash without credit checks or restrictive guidelines. The downside of course is the interest rate. It’s not uncommon to see monthly interest rates of 5%, as reported by one business owner using gold and jewelry for a $20,000 loan.

Factoring Invoices – A Viable Alternative to Pawning for Payroll

Rather than pawning for payroll, small business owners can turn to less expensive options like selling accounts receivable. In today’s competitive market factoring fees often average less than 5%.
Instead of making a loan, factoring companies purchase outstanding invoices at a discounted rate. They look to the strength of the customer or debtor on the invoice instead of the business selling the invoice, making it a viable option for business that aren’t consider “bank quality” to traditional lenders.