Accounts Receivable Financing & Factoring Companies
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In order to succeed in business, you must have access to affordable credit. This requires a financing solution that empowers companies to be more proactive instead of reactive. Accounts receivable financing is one powerful solution that puts the power of business financing in the hands of companies and business owners. Given its popularity among today’s businesses, what can companies unfamiliar with this financing option expect? More importantly, what is accounts receivable financing, and why do some companies consider it to be their financing method of choice?
Accounts receivable factoring works because it allows companies to use the liquidity within their existing assets to finance their business. These assets are a company’s receivables, or otherwise referred to as its account debtors’ unpaid invoices. Factoring companies advance capital based on the invoice’s value, its age and the account debtors’ payment history. Earlier invoices garner higher credit, as does an account debtor with a strong credit history. Companies may have to divulge financial statements, go through a credit check, or, on occasion, be asked to provide collateral. An emphasis is not put on the previously mentioned items but on the account debtor’s ability to pay the invoice. This makes receivables factoring incredibly flexible and a financing option almost all companies can use.
The global recession has made it extremely difficult for account debtors to pay on time. These late account debtor payments force businesses to be late themselves, leading to higher interest rates on bank loans and credit lines. In the end, it leads to further late payments. However, factoring alleviates the concern of late payments by advancing the company funds based on their receivables age and value. Companies use their receivables as credit and get access to working capital sooner. The factoring company then collects from the company’s account debtor, charges the company a nominal fee, and reimburses the company the difference between what was originally provided and what was collected on the invoice.
Businesses today need flexible financing options. They simply can’t be inhibited by waiting on their account debtors to pay their invoices. For a practice that goes back well over 4000 years, accounts receivable factoring has withstood the test of time because it is a financing solution that businesses find easy to use and provides a solution to working capital.