Accounts receivable financing, also known as factoring, is a viable alternative to a traditional business loan. Many small and large B2B companies have turned to this alternative to facilitate reliable cash flow and keep business running on schedule.
What is Accounts Receivable Financing?
With accounts receivable financing, a factor will purchase your company’s invoices at a discounted rate, give you the funds immediately, and obtain payment from your customers when it is due. Many businesses suffer from cash flow constraints simply due to the regular 30-90 day A/R process; factoring increases cash flow for businesses and helps them meet payroll, pay off existing debts, purchase inventory and equipment, and increase overall sales.
Still need convincing? Below, we list the top 5 things you should know about accounts receivable financing and how it can help your business thrive.
1. A/R Financing is Not a Loan
Factoring is NOT a loan. Unlike traditional bank loans, accounts receivable financing does not accrue any debt for your business. Factors purchase the right to receive your customers’ payments when they are due, giving you immediate funds and leaving you with nothing owed. Applying for a traditional bank loan requires a heap of paperwork, comprehensive financial background reviews, and restrictive financial covenants.
Worried about qualifying? Even if your personal or company credit isn’t perfect, accounts receivable financing is still a viable option to explore. Factoring is based on the quality of your customers’ credit and the underwriting process for approval requires half the paperwork and a fraction of the waiting time (4 hours compared to 4-6 weeks for a traditional bank loan). The invoices that you factor leave you no debt, but instead give you immediate funds to accommodate new business and projects that help your business grow.
2. Expect a Fast Turnaround
Anyone who has applied for a business loan knows that it takes anywhere from 2-3 months to receive funding. This long waiting period comes after the process of compiling personal background information, business plans, personal and company credit reports, income tax returns, financial statements, bank statements, collateral, legal documents, and more.
The application and underwriting processes for factoring only require a fraction of the backup documentation required by a bank, and no collateral is needed for approval. In fact, once an application is approved, initial funding typically takes only 24 hours. If you factor on an on-going basis, each time receivables are submitted and verified, you’ll receive funding in as little as 4 hours. How’s that for fast?
3. You Have Complete Control & Flexibility
With accounts receivable financing, you can choose how many or how few customers you would like to factor. Got a large project coming up that requires immediate funds? Factor just a few; it’s that simple! Many businesses also use accounts receivable financing as a constant and reliable source of fast funds, choosing to factor multiple or all customers each pay period. With factoring, there are no long, binding contracts — you have complete control.
4. A/R Financing is Cost Effective
With any institution, there are fees involved for service. But fees associated with accounts receivable financing should NOT be confused with interest rates. Here’s how the process works:
- You submit your accounts receivable to a factoring company
- The factoring company provides you with up to 98% of their value
- Your customers make their payments
- The factoring company pays you the remaining percentage, minus funding fees.
Typically, the funding fees are tiered based on a combination of the volume of invoices being factored, stability and creditworthiness of your customers, average payment cycle, and average invoice size.
5. A/R Financing Offers Additional Services
Along with fast funding, accounts receivable financing brings a variety of other services along with it that you wouldn’t expect from a loan officer, including:
- Soft credit check of the customers whose invoices you would like to factor
- Invoice ledgering and accounting
- Creation of accurate and timely invoices
- Quick and efficient management of the overall A/R process
- 24/7 online reporting of activity
Factoring companies help business owners take the hassle out of the A/R process. We will work with your customers to encourage payment of invoices within the terms that you set. Why spend time chasing down money when you could be making more of it?
The Best Alternative to a Loan
Factoring accounts for over $140 billion a year in transactions in the U.S. alone. Are you curious if it could help your business? Fill out an AmeriFactors application and you could be approved for funding in 24 hours or less. Stop letting your business get away from you with aging A/R reports. Factoring can help you get the funds you need when you need them, not 60 days later.