If your business is steadily growing and you’ve just landed some big jobs, chances are you need liquid capital. You know that future contracts will shoot your profits through the roof. The only problem is that the jobs are a huge financial investment, and you won’t survive waiting for the payout. How do you keep your business running while you’re waiting on outstanding bills? Use an accounts receivable factoring company.
Whenever you invest your money into a large job or offer a line of credit to your customers, you’re taking a financial risk. A large paper trail only looks good when it’s converted into real cash. Many customers won’t pay until the due date, which is usually two or three months after the line of credit is given.
A factor company takes your accounts receivable from you and gives you a percentage of cash up front while they collect the debt. After the company receives the money, the factor pays you the rest minus a small fee. The factor company takes the stress of debt collection away so that you can focus on more important aspects of your business.
For example, you need to pay rent and make payroll, but you just invested a huge sum of money into a new project. If you were to wait until each customer pays you, your business may start to sink quickly. Sell your invoices and you’ll have working capital immediately.
Factoring is similar to accepting credit cards. When you allow customers to use cards, you pay a fee to the company offering the credit in exchange for an immediate payment to your account. This process is very similar to selling your accounts receivable.
Factoring is important for businesses that have a lot of money tied up in commercial receivables. Retail stores invest money into the products they sell and often use factoring to keep working capital flowing. Factoring is frequently seen in manufacturing companies as well.
In order to keep working capital flowing, it’s important to make factoring a regular practice. If you choose to use the same factor every time, they’ll lower their fee as a reward. A longstanding relationship with your factor company makes factoring more like a short term business loan. If you own a new business, banks often won’t offer you a loan, but factoring is still a viable option. On the other hand, an established business may outgrow the bank’s line of credit.
Factoring isn’t the only option for obtaining capital. Check to see if you are eligible for a business loan at a very low interest rate. If some of your customers have unreliable credit history, consider your options carefully. Some factor companies demand repayment of the advance plus their usual fee if a customer fails to pay the debt.
Accounts receivable factoring provides the working capital required to keep your business alive. If you’re serious about expansion, factoring should be an integral part of your business strategy. It’s an old process that is a proven method of gaining working capital quickly and easily.
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