Understanding Accounts Receivable Financing and Factoring

If your business is having cash flow issues, it might seem like all you can do is play the market by ear and hope things get better, but accounts receivable financing and factoring may provide just the answer you know that you need. This may sound like a completely foreign term to you, but it doesn’t have to be. Here’s how it works.

1. Accounts receivable financing actually involves selling your unpaid invoices at a discount to a company that will take on the risk of those unpaid invoices. In return, the company gives you some quick cash for whatever you need, whether it’s to pay your employees or to order product so that you can fill a big order that is coming in.

2. The amount of money you will receive for your invoices depends largely on how old they are. Current invoices are worth more than those that are older. If you’ve got invoices that are more than three months old, you probably won’t be able to find financing for them.

3. Accounts receivable financing is a way to pass off your collections, essentially outsourcing them to another company, which frees up your own employees for more important activities like selling or serving your customers. Although in some cases, the finance company may allow you to manage your own collections since you know your customers better than anyone.

4. You get instant access to working capital, which is important because many companies have their capital in current inventory. If you need quick cash rather than inventory, this is one of the fastest ways to get it.

5. You don’t need to draw up a business plan or provide tax statements to a financing company. All you need is your stack of unpaid invoices, which are then passed on to the invoice factoring company. In some cases there is additional information needed but primarily the approval process surrounds the creditworthiness of your customers, so financial or business history is irrelevant.

Of course you should always consider the options whenever your company is facing a financial crisis. Often you will need a creative way out of your problems, and accounts receivable factoring is exactly that. But sometimes you might need to look into other creative methods of financing. Before you dive into accounts receivable financing, you should ask yourself if you really need the money, and if so, what do you need it for? If it’s to help your company survive or take advantage of a major deal that requires some working capital, then it’s definitely worth your time.

Then you also have to consider whether your business is actually ready to expand. If not, then you might want to wait just a little bit before taking advantage of this creative financing method. There may be other creative alternatives that will work better for your specific situation. Before making any major financial decisions, you should check with someone who specializes in creative financing for businesses that are having cash flow problems.

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