Accounts Receivable Factoring
Factoring v. Accounts Receivable Financing
What is the Difference?
There are a number of ways to get cash for your business, and factoring is just one of them. At first glance, it may seem like accounts receivable factoring and accounts receivable financing are similar services. They aren’t. The biggest difference between the two is that factoring involves receiving your money from an outside business, while financing is getting a loan for your business.
Factoring occurs when a third party company buys your accounts receivable at a discount. This type of arrangement lets you obtain cash up front – usually within 24 hours. Factoring, however, does not reduce the amount of interest you pay on business loans.
The Benefits of Factoring
Because factoring negates the need for loans, it helps businesses free up cash flow and avoid interest expenses. It can also be a useful tool when times are tough or credit is tight. The process is efficient. Once you set up your factoring account, there’s no need to submit applications or wait for the approval. You get paid immediately upon shipment of the goods.
“Accounts Receivable Financing”
The most common type of accounts receivable financing is a revolving line of credit secured by your accounts receivable balance. The money you save on interest is not as great as with factoring, but this form of financing can be more flexible. You can borrow and repay the line of credit as you need it, meaning that at times you won’t have to pay interest on what you take out. It also gives your business a steady cash flow rather than an influx of money all at once.
The Drawbacks of Factoring
Factoring does come with certain drawbacks. An upfront cash payment will not create the same positive effect on your company’s statement of cash flow as a loan. You also have to pay fees for factoring services, some of which are based on a percentage of the total amount.
In addition, factoring is less attractive when you’re trying to build relationships with vendors and suppliers – especially if you have a long-term relationship with them.
Because factoring is based on volume, it can be risky if the orders do not come in as hoped. This makes factoring unsuitable for businesses with seasonal fluctuations or those that depend on impulse purchases.
How to choose a good factoring company
To find a factoring company, check out trade associations or online directories. Review the information on each option and compare rates. Also ask about fees and other costs to determine which would provide you with the greatest savings in the long run.
Some companies offer both factoring and accounts receivable financing so it’s important to keep that in mind when searching for a partner.
Factoring and Small Businesses
Factoring can be a boon to small businesses which lack the money or collateral to secure loans. It also works well if you have few financial resources and need to get cash in a hurry. However, it’s not ideal for all businesses and doesn’t provide the same benefits as business loans.
Factoring is not a good option if you’re trying to build long-term relationships with suppliers or business partners. It also doesn’t create the same positive impact on your company’s cash flow statement as loans do. And keep in mind that factoring will cost you money, some of which is based on a percentage of the total amount.
To find a factoring company, contact your trade association. You can also check out online directories and review business partners’ information to compare rates later on.
What to consider?
Simple reasons: 1) cash flow improvement; 2) cost savings; 3) improvement of business credit standing.
What things does factoring depend on? Accounts receivable, debtor reliability, and a decision maker who has the power in doing business. What if someone said “no” to your business growth? What happens when your customers do not pay what you expected? No cash flow means no sales.