In today’s modern economic climate, how does a business get the extra cash it needs to survive? Business loans are often difficult to obtain, and you need capital to survive and expand. One proven method to get more cash to invest in your business has been around for thousands of years and is still practiced today. Known as accounts receivable factoring, it is a quick, low-risk way to keep your business moving by giving your business the extra financial boost when needed.
In order to help small businesses, the government sometimes offers business loans. Many of these loans don’t have to be repaid for a year or more. This is one way to get a healthy dose of capital, but not everyone qualifies. Another way is to turn your old invoices into cash using accounts receivable factoring.
When you factor your invoices, you receive a large percentage of the money owed up front. This is usually somewhere between 65 and 90 percent of the total. The factor company proceeds to collect the debt. When they are paid by your customer, the factor gives you the rest of the money, minus a small fee. This fee is usually around 2 to 3 percent, though it could be lower or higher depending on your history with the factor company.
There are two main types of transaction when dealing with accounts receivable factoring. These are recourse transactions and non-recourse transactions. A recourse transaction means that you are responsible for paying the factor company if your customer fails to pay the debt.
Many companies that offer accounts receivable factoring are trending toward recourse transactions. This is a self-protective measure to help the companies avoid financial trouble. By eliminating the chance of non-payment, factors are able to offer their customers a lower fee for their services. They are also better able to serve more customers without the added worry of non-payment. If you only do business with longstanding customers, non-recourse transactions are a great option. In the long run they are be better investments than a small business loan, especially if you stay with the same factor for an extended period and receive valuable customer discounts.
Naturally, some factor companies work the opposite way. By offering non-recourse transactions, accounts receivable factoring companies are able to stand out in the crowd, but at a cost. In these unstable economic times companies desire a guarantee. This is why factors offering non-recourse transactions examine your customers more stringently than ever before and why many of your customers get rejected. It’s not a mark against your judgment. Rather, it’s a sign of increasingly strict credit requirements in everyday business transactions.
In tough economic times, factoring is a reliable method to free up cash for reinvestment or to reconcile debt. Though the trends lean toward recourse transactions, you will also find companies offering non-recourse transactions. Either way, shop around for the right factor for your business and be sure to find the best fit for your business needs.
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