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Accounts Receivables Financing ( Invoice Factoring )
Accounts receivable, invoices or whatever you call it accounts for trillions of dollars yearly. It ties up much needed resources for small, medium and large businesses alike, but it is especially hard on medium and small companies. If you are a small business owner you know the havoc it can cause on your immediate cash and your long term growth. Having the resources ready to take advantage of opportunities as they arise is vital to the day to day functions of your company. So, how to you turn this seemingly negative situation into workable cash you can use to grow your business? Well, you can use a accounts factoring company or trade your invoices yourself. I will try to explain both to help you make an informed decision.
FACTORING COMPANIES
First we will take a look at selling your accounts receivables to factoring companies or what is called accounts receivable factoring or accounts receivable funding or accounts receivables financing. There are many companies that offer this service as there sole business practice and some that has it as a side service like a bank for example. Usually there is a minimum to work with the latter, some where around $5 million in annual sales revenue. The first thing you should know is that you will be selling your accounts at a discounts of the face value. The discounts is dependent on your customers credit and the age of the invoice; the average is around 5%. The older the account the less you will be able to get for it, companies usually do not buy receivables that are more than 90 day old as it is likely a noncollectable account. The second thing is should you opt for non recourse factoring or recourse factoring.
When dealing with a factoring company you can expect to pay a fee for their services. Most companies charge anywhere from %2 to %6 of the total invoice or invoices. Some companies will collect payment directly from your customers and send you what’s left after taking there fees. This can be a good thing for you; it frees you of trying to collect from that customer. There will also be other fees outlined in your agreement so, be sure to read it carefully or have your attorney look at if for you. After you have agreed to the terms you will receive the money within a few days depending on the company.
TRADING ACCOUNTS RECEIVABLES YOURSELF.
Unlike selling your receivables to a company, you auction them in a marketplace similar to Ebay to investors. A receivables marketplace gives you more control than a factoring company. You will still have to sell your accounts at a discount, but you will have more say in how much of a cut you are willing to take.
You will not be selling accounts to individuals, but to commercial entities that has passed the membership process of the marketplace. This process includes a background check, legal paperwork and a minimum in investing capital. This is a secure alternative when looking for receivables financing ( receivables funding ). There are fee to use the marketplace which includes registration, posting, closing transaction and administrative fee.
Both are great avenues to getting to cash flow you need for your business when you need it. Do your research before deciding which way you will go. Be sure this is the last option for your business because you will be taking a lost for the benefit of immediate cash.
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