Business owners who are trying to get enough working capital to fund the daily operations of their business often turn first to small business loans or lines of credit. But is that always the best choice? What happens if you can’t get approved for a loan yet?
Factoring, also known as accounts receivable financing, is an alternative option to help you quickly get the cash you need to fund your company. Here’s how it works: you submit your unpaid customer invoices to an accounts receivable funding company who can then send you funds for those invoices, typically the same day, for a small percentage of the total invoice value. For many businesses, factoring provides an ongoing source of cash to meet payroll, take advantage of vendor discounts, meet ongoing working capital needs, and even finance new opportunities.
But how do you know if receivables financing is the right business choice for you? Let’s take a look at the key benefits of factoring and a few things you should keep in mind when considering this as a financial solution for your business.
Benefits of Factoring:
1. Get quick cash. If your customer payment terms are net 30, net 60 or even net 90, you’ve likely experienced cash flow challenges at some point. Invoice financing gives you upfront cash for those invoices to help you cover business expenses as well as fund business growth and new opportunities.
2. Not incurring debt. It’s not a loan. Unlike a small business loan, factoring does not affect your credit or require you to make ongoing debt payments. What’s more, obtaining approval is not based on the creditworthiness of you or your company, instead accounts receivable lines are based on the credit of your commercial customers. There are also no financial covenants to maintain as with a traditional line of credit. Think of it more like a trade. In exchange for a small percentage of your profits, you’ll be given immediate capital to finance your business.
3. Less risk and more service. Most factors pay 80 to 90 percent of the value of the invoice up front, and the remainder (minus the financing fee) is paid to you once your customer pays the invoice. Many factoring companies also offer additional services to help ensure payments are received, from reviewing customer credit information to determine collectability to assisting with payment inquiries from your customers or even sending out statements on your behalf.
Questions to Ask before Factoring:
Will factoring fix my cash flow problem? If your cash flow struggles are primarily that you can’t wait 30, 60 or 90 days to get paid to cover your operational expenses, receivables financing can be a valuable option for you.
Are my profit margins high enough to cover the cost of factoring? The cost of factoring varies based on your sales volume and customer credit quality, among other considerations, but as a general rule, if your profit margins are at least 15 percent, you can afford to factor your accounts receivable and still make a profit depending on the factoring partner you choose.
Are my customers creditworthy? One benefit of invoice financing is that it is not dependent on your own creditworthiness, but rather that of your customers. Before inking an agreement, the factoring company will typically check the commercial credit of your customers to ensure they have a sufficient credit history to support the sales you have with them and the invoices to be funded.
Does my company qualify for receivables financing? Before you can begin financing your invoices, you must first be approved. This process can be fast and relatively easy — you’ll need to provide information on your company and your customers to get started. Questions may focus on the creditworthiness of your customers, if you have other liens on your accounts receivable, how your billing works and if there are contingencies to getting paid on the invoices. Some factoring companies may not be comfortable with certain industries or billing types. Others may have concerns with tax liens. At Allied Affiliated Funding, we finance a variety of industries throughout the nation. And, we’ve worked with clients with tax situations since we started in business over 26 years ago. The easiest way to find out if your company qualifies is to call.
Do you have questions about receivables financing or want to see if you qualify?
Contact Allied Affiliated Funding today to learn more. Allied Affiliated Funding, a division of Axiom Bank, N.A.