Factoring Receivables: Can Businesses Benefit from an Advance of Funds Based on Accounts Receivables

The most important calculation on any balance sheet is the line where the expenses are subtracted from income, to determine a company’s net profit.

The expenses of running a business are not small. Many businesses struggle to simply make ends meet, when it comes time to pay the monthly bills and the costs of keeping employees. In many of these cases, the person reviewing the finances looks at overhead costs – the cost of their physical location, business equipment, marketing and advertising, payroll and other staffing costs – and feels some concern over the ability to meet financial obligations.

Sometimes a problem can arise when a business seems to be prospering, but the amount of its invoices is more than the amount of money available to meet its expenses. The money should be coming in, but it is not. Instead, the company’s potential income is in the form of unpaid invoices, and the success of many small businesses depends on its ability to collect this money in a timely fashion.

How can business owners expect to meet their financial obligations without risking default, while waiting for their own customers or clients to pay?

One solution is to contact banks or other traditional lending institutions to apply for a loan or other line of credit. A more viable option may be to use the company’s accounts receivable as collateral, in order to receive advance funds against the face value of the company’s invoices. This type of financial service is known as accounts receivable factoring, and a factoring company is the kind of financial institution that provides the loans against outstanding invoices.

A factoring company is able to use accounts receivable as collateral and will advance funds against the face value of any invoices owed to the company. The amount the receivable finance agency will advance to a business depends on many factors. The factoring service looks at the total amount of outstanding invoices, and the credit rating of a business’ customers. It is able to provide the business with the funding that it needs, based on capital that is due to it in the form of outstanding invoices.

For growing companies, traditional lines of credit are rarely the best solution to a financial problem. To begin with, there are usually considerable interest rates to contend with when a business takes out a loan or line of credit. Banks, rather than looking at a company’s potential and growth, will look at the business history – something that will favor reducing the bank’s risk and will often work against the business requesting the loan.

By utilizing a factoring service company that uses accounts receivable as collateral, the needy business manager can receive a receivables loan, against most of its outstanding invoices. With this factoring money available, a business can:

* Access the money that it needs, without creating debt and without the additional loan expenses.

* Receive a cash advance against money that is already owed to it – money that can be used to expand the business, finance a marketing campaign, or cover the costs of operation.

* Finance the growth of a start-up operation.

* Borrow against the creditworthiness of its customers, rather than against its own credit history.

When a business works with a factoring company that uses accounts receivable as collateral and will advance funds against the face value of invoices, the business will find itself on more solid financial footing.

The business will, in effect, sell its outstanding invoices to the factoring company. Once the business has an established relationship with that company, it will be able to have the funds it needs for its business within about a week. This is a much better scenario than waiting for thirty, sixty, or even ninety days for payment from a customer.

As a result, the business – whether it is within a service field, provides manufacturing services, or provides products for customers which are often reimbursed by an insurance company – no longer needs to wonder when its invoices will be paid. The business’ finances will no longer be dependent on customers paying their invoices on time, because the factoring service will take on the risk of the company’s unpaid invoices. When a business is not saddled with the struggles with cash flow, its managers can focus on other aspects of operations, like marketing and sales.

For a business that has seen issues in the past with clients who do not pay invoices in a timely manner, getting set up with a factoring service company could mean the difference between struggle and success. Since the factoring company is putting cash directly into the company bank account, shortly after the company issues its invoices, the company can relax in knowing that it will have the cash-on-hand to pay bills when they come due.

Whereas traditional banks look at the business’s history, factoring services look at the customer’s credit rating, when deciding to give a loan. This enables the receivables factoring service to advance funds to the business, with unpaid invoices as its collateral.

The really attractive feature of loans against receivables is that a business can gain nearly immediate access to its own money, without taking on extra debt for the business.