Can Accounts Receivable Financing Help Your Company?
If you find yourself in need of cash to keep your business operating, you may consider a form of revenue generation known as factoring or accounts receivable financing. This plan involves selling your outstanding invoices, at a greatly reduced amount, to a company that will perform collection activities and keep the profits. This type of service has existed for a long time and has likely helped many businesses stay afloat during difficult times. Factoring carries with it a few drawbacks, but it can be a great survival tool in some instances for businesses is desperate need of funds.
One of the features of accounts receivable financing that can make it an attractive option is that it will not affect your credit rating. In some cases, a business might not want to apply for conventional loans or lines of credit because just applying can lower your credit rating. If your plan is to build your credit capacity while getting out of immediate financial trouble, factoring may offer you a solution. Another benefit is that this type of funding is usually quick. Since the factoring company is typically getting such a great deal, they tend to move the proceedings forward as quickly as possible.
The way accounts receivable financing works is easy to understand. One party, the business needing money, possesses a large amount of unpaid invoices. Since bill collections is not usually the primary function of this business, the unpaid amounts can sit for a long time without any action occurring. Another party, the factoring company, has the wherewithal to pay a small percentage of the invoices total worth to take possession of them. They buy the outstanding bills with the plan to pursue the customers and encourage them to pay all or part of the money they owe.
This can be a mutually beneficial arrangement since the company with the outstanding invoices gets what it needs—immediate cash without an adverse mark on their business credit. It is also relieved of the responsibility of having to collect the money it is owed. The accounts receivable financing company gets the potential to earn a substantial profit by engaging in normal debt collecting activities and getting as much money as possible out of the invoices. As long as the factoring agency behaves ethically, the original customers can also benefit by being encouraged to pay off their outstanding bills. This helps them improve or reestablish their own credit ratings. When handled properly, the buying of accounts receivables can help your business to get out of trouble, meet daily operation costs or in some cases even take advantage of an opportunity to expand.