When your business is looking to expand, look into accounts receivable factoring as a way to free up capital. Factoring is a time-worn method of gaining quick cash to reinvest. It’s an easy way to keep your business one step ahead of the competition.
Factoring is the process of selling outstanding invoices to an outside company. The price is usually slightly less than the full amount of the debt. The average amount paid is about 75 to 90 percent. The factor company then collects the debt for you and pays you the remainder, minus a small percentage.
Accounts receivable factoring is a way to free up time and resources. By using a factor company to collect a debt, you are able to focus more time on activities that expand your business. Too much time spent on debt collection causes small businesses to fall behind their competitors. The company becomes the principal collector, not your agent, so the grunt work is completely off your hands. It’s different than turning over accounts receivable to a collection company.
One thing to avoid is using a factor company too often. Sure, it’s a great idea for a quick influx of money into the veins of your business, but it can be costly if overused. The fees can easily top the interest of a business loan.
Also, different types of debts incur different fees from the factor company. Current debts will yield the best results, with a low fee. As the age of the debt increases, so does the fee. Many companies won’t factor debts that are over 90 days delinquent. The company isn’t concerned with your business good credit rating as much as with your customers’ bad credit rating.
Two different types of transactions exist between the factor and your business. These are recourse and non-recourse transactions. In a recourse transaction, your business takes responsibility if the customer doesn’t pay the debt. You pay the advance and the fee associated with the deal. In a non-recourse transaction, the factor company takes the responsibility. The customers’ credit rating is looked at more closely in this type of transaction.
A huge advantage that factoring has over business loans is the easy way they are handled. For a business loan, you must fill out form after form and undergo a waiting period. Account receivable factoring is a much quicker way to get capital and move your business to the next level. It’s especially handy if you’re eyeing a supplier discount, or are trying to land a big job and need money for materials immediately. Finally, if you’re just having trouble collecting the money that you are owed, a factor company is made to get that money.
Ask yourself some questions before factoring. Are you better off with a business loan? Do you have the time and resources to collect the debts yourself? Is the fee too much? Remember, you can always shop around for other companies and find the best deal for your dollar. In these tough times, it’s important to monitor and protect every bit of money flowing out of your business.
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