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Accounts Receivable Factoring

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The Power of Accounts Receivable Factoring  

Factoring is the type of financing where a business sells its receivables (invoices) at a discount from their full value to a factoring company. By factoring your invoices, you will receive from 70% to 90% of the amount of invoices within 24 to 72 hours. The balance, less a factoring fee, is paid as invoices are paid. Unlike a bank that will lend you money based upon your ability to repay, the factoring company advances you money based upon the ability of your debtors to pay what they owe you.

Today in America, domestic factors provide over $125 billion in financing to small and large businesses alike. In spite of its power and size, however, it is one of the least understood methods of business finance.

BENEFITS

  • Funds wire transferred to your bank account within 24 to 72 hours
     
  • Eliminate waiting 30 to 90 days for payment
     
  • Save existing lines of credit
     
  • Fund business growth/expansion without adding new debt
     
  • Receive capital without regard to your credit rating
     
  • A continuous source of cash as your business grows
     
  • Take advantage of cash discounts on your bills for early payment
     
  • Retire debts
     
  • Increase production/sales
     
  • Pay vendors/purchase raw material

Here is a simple Factoring Case Study that demonstrates how one company effectively used this form of alternative financing to grow their business without taking on additional debt.

HOW IT WORKS

As a source of business finance, factoring has no equal. It is the most immediate, readily available, and powerful method of providing working capital to growing businesses. Unlike traditional methods of bank finance, however, true factoring is never in the form of a loan.

In factoring arrangements, a finance company (known as the "factor") purchases accounts receivable from a company (known as the "client') for immediate cash. This has the effect of "freeing up" a company's working capital that is "trapped" in its accounts receivable because of the necessity of granting liberal "terms of payment" to the client's customers.

Modern factors are extremely flexible and generally offer several methods or programs to customize financing for their clients. As a ready source of business capital, factoring provides:

  • weekly capital for payroll....for businesses required to offer 30,60,or even 75 day terms of payment yet must pay employees weekly or bi-weekly.
     
  • opportunities for supplier discounts....factoring your accounts receivable allows you to pay your suppliers earlier, taking discounts for such early payments.
     
  • credit building....for young companies with short credit histories, initial factoring relationships can be an important key to obtaining adequate traditional bank capital at a later date.
     
  • credit leveraging....because factors primarily focus on the creditworthiness of your customers, young businesses can leverage their available working capital and credit by employing factoring as their primary source of funding.

Factoring is not a method used for the collection of bad debt. In fact, because they are not traditional lenders, factors judge their ability to provide financing to your company on the creditworthiness of your customers, not you. This is why factoring can be so valuable to start-up and first stage companies that have not yet been in business long enough to establish bankable track records compatible with the strict lending requirements of commercial lending institutions.

CAN FACTORING BENEFIT YOUR BUSINESS? Click here to find out…

ADVANCE/RESERVE FACTORING

US Business Finance employs the advance/reserve method of factoring whereby a client will send his/her original invoices to be immediately purchased.

After quickly verifying the authenticity of the invoices, the factor will create an advance schedule that will be faxed to the client to determine its accuracy and for assignment. After return of the advance schedule, the client generally receives payment for invoices directly wire transferred into his/her business account.

Advances on purchased invoices typically run 75-85% of their face value with the balance remaining as a reserve to offset against any uncollectible invoices. After successful collection, the factor periodically remits the reserve balance to the client but first deducts its fees for services or discount.

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