In a nutshell, factoring is basically a process of financial transaction between a business and a factoring agency where a business sells its receivables to a factoring agency at a discounted amount in exchange for immediate cash. Factoring largely helps businesses that regularly face cash flow problems by providing immediate cash to pay off immediate bills.
Contrary to popular opinion, factoring doesn’t work similarly to a loan. It doesn’t add debt to your balance sheet at all. In fact, factoring improves your balance sheet by converting your receivables into cash. And, unlike loans, you don´t need to provide leverage or collateral to receive cash during the factoring process.
So, what is accounts receivable factoring exactly?
It is completely possible for your business to provide a generous credit policy to your customers in a bid to attract more customers. Although you may attract more business with this strategy, you will also have to wait a long time for the accounts receivable to be paid.
How do you manage to pay your employees in the meantime? How do you pay for the operational costs? How do you grow your business and fulfill your tax obligations? Without money to grow and expand, your business will lose out on a lot of deals, opportunities, and lucrative contracts. For instance, it is possible for you to lose out on sales because of a lack of money to restock your inventory in a timely fashion.
Fortunately, through the concept and method of accounts receivable factoring, it is possible for businesses to sell their accounts receivables to a factoring agency at a discounted rate in exchange for immediate liquid cash.
How is accounts receivable factoring beneficial to your business?
Accounts receivable factoring can provide you the much needed liquidity to grow and expand. The money can also be used to cover payroll expenses. What else can the cash be used for? Well, it can be used to pay outstanding tax obligations, used to organize marketing campaigns, and fix other cash flow problems. The purchasing power of your business will increase tenfold with the cash.
An example of accounts receivable factoring;
Let´s say that you own a trucking company and that your business is responsible for delivering essential goods and supplies all over the nation. Now, when you run a transport business, you only get paid when the goods and supplies are delivered. There is a major disparity between the completion of the work versus the duration it takes for the client to process the payment. When there is a cash flow problem, how will you manage to pay your drivers and the monthly truck expenses involved? With accounts receivable factoring for trucking companies, you can easily sell your accounts receivables for immediate cash. The immediate cash can be used for operational costs.
Accounts receivable can also be beneficial if your run a staffing agency. A staffing agency is tasked with filling vacant positions in companies across various sectors. However, most of the staffing agencies usually only get paid after they fill the vacant positions. It´s either that or clients usually pay the invoice in 30-90 days. This is why staffing agencies usually face cash flow problems. The financial delays makes it difficult for the agencies to pay their staff, fulfill their tax obligations, and make rent. During times when there is a cash flow squeeze, staffing agencies can rely on accounts receivable factoring for immediate liquid cash. The agencies can then use the cash to meet payroll deadlines, fulfill tax obligations, and invest in advertising or marketing.
Want to learn more? Contact Carter Funding today to learn how factoring can help your business grow!