Cash flow shortages can happen to almost any business, but account factoring can provide a quick, easy solution. Account factoring involves the selling of your top company for invoice factoring account receivables or accounts to secure immediate working capital.
Account factoring lets you discover cash that’s tied up in your past due accounts. Obtaining cash this way can be an easy, effective tool to resolve small or medium size businesses financial challenges. Account factoring might be right for your business if you lack adequate working capital to maintain your operations or expand to another location level. Perhaps you’ve considered additional options like loans, lines of credit or credit cards. If your company doesn’t have enough financial stability or business credit, account factoring could be the perfect alternative to bank financing.
Here’s why: Approval for account factoring doesn’t hinge on your company’s credit history. Instead, it depends on the creditworthiness of your customers. Companies that purchase accounts will evaluate your visitors based on their stability and payment track record. The account factoring company’s main concern is determining how likely your visitors will pay and how quickly.
Apart from your visitors meeting qualifications, your accounts must also pass certain criteria. There cannot be any existing primary liens on your accounts, meaning no other company should have a claim on the payments once they arrive. This ensures that the company purchasing your accounts has a clear directly to collect the funds in your place.
Just about any company that generates commercial accounts can take advantage of account factoring. But is account factoring right for your business? It could be if your business is struggling to pay bills because of long charging pays out, you’re wasting time collecting down payments from slow paying clients, you’re unable to take advantage of work at home opportunities due to lack of funds, or your business isn’t financially strong enough to obtain traditional bank financing.
Advantages of Account Factoring Besides providing fast access to capital, account factoring offers a number of other important advantages. It gives you unlimited access to funds without adding liability to your balance piece. Because account factoring isn’t a loan, there’s no debt or monthly obligations involved. Plus, account factoring is a flexible arrangement because it doesn’t require any long-term contracts.
Additionally, account factoring makes it easier for you to offer credit terms to customers. It will help you increase your sales without negatively impacting on your hard earned money flow. Account factoring also can help you take advantage of the early payment discounts many vendors offer on bills within ten days. Ultimately, account factoring can help build business credit. Your money flow you create from account factoring causes it to be possible to pay your vendors on time and set up a stronger credit rating. And this can assist you with securing credit from other vendors and financial institutions.
Another significant good thing about account factoring is the professional commercial collection agency service given by the factoring company. The factoring company is equipped to handle debt collections professionally and efficiently, leaving your staff to spotlight core activities such as creating more sales. In addition, this will lessen your costs associated with processing accounts and handling collections costs.
How Account Factoring Works Account factoring is a transaction in which you sell outstanding accounts for immediate cash, instead of waiting the conventional 30 days for the accounts to be paid. You get an up-front, lump-sum payment for your accounts that’s slightly less than face value. The advance payment which can be provided within as little as a day is typically 75 to 90 percent of the total account value.
After the purchasing company receives full payment for the account, you’ll have the remaining value less a ‘factoring’ fee. This fee is based on a number of factors, together with your consumer’s credit worthiness, the average terms, and the account number and size. However, generally, the account factoring fee is up to five percent of the account value.
To give you an idea about how account factoring transactions work, here are some of the main steps in the process:
1: You fill out an application to an account factoring company.
Step two: After you’re approved for account factoring with the company, you can start forwarding your consumers’ accounts to the company for cash advances. (Your customer will get a bill from the factoring company, that is responsible for all payments processing activities related to the account. )
3: Assuming everything checks out, you’ll be advanced up to 90 percent of the value of the purchased accounts.
Step: Your visitors most likely submit payments to the company that bought their account. This provider, in turn, will forward you the residual, past due part of the account eliminating the account factoring fee, of course.
When choosing an account factoring partner, it’s important to select the right kind of company to work with you and your customers. Here are some important considerations to remember:
a What type of reputation and track record does the company have? When you turn over your visitors, make sure they’re in good hands and that the factoring company is capable of providing the funding you need.
a How much is the account factoring company charging? Evaluate all the components of the price, including any fees, the interest rate and the part of your account that is held back in ‘reserve’.
a What are you going to get for your money? Determine their accounting, confirming and other capabilities.
a How will the account factoring company treat your clients? The company will have to communicate with your visitors after they control your accounts. You want to be sure the interaction that occurs is positive. If it isn’t, it may reflect negatively on your own relationship easy customers.