While many businesses have cash flow problems, not all are eligible for traditional or common types of loans. This is true for a startup business, many family businesses, and many businesses where there is no history of the company having assets and making a profit.
This doesn’t mean these companies aren’t destined to be highly successful; it just means that they don’t meet the criteria for a loan as determined by a bank or other traditional type of lending institution. For these companies, or businesses that have a cash flow problem because of seasonal demands, large contracts or atypical growth, receivable funding may present just the funding source they have been looking for.
The Basics
The core component of receivable funding is a specialized company, known as a “factor” buying your accounts receivable. These are your open invoices that are pending payment from your customers. The factor will verify the creditworthiness of those companies and along with other information will approve or deny the application for the receivable funding services.
When approved, the factor will then fund up to a percentage of the value of the accounts receivables, typically 80% that you choose to sell. Once they fund for those accounts receivable the cash is yours to use as you need for your business. Then, once your client pays the factor the full amount of the invoice the fee for the service is deducted from the 20% the factor holds, and your company is refunded the balance.
Considerations
When choosing which accounts receivables to sell there are some variations to keep in mind.
The factoring company offering receivable funding and working with your business will also verify all your customers, allowing you to have insight into doing business in the future.
All factoring companies charge a rate based on the amount of accounts receivable funding required. However, the small amount of the fee can be offset by saving time with collections, freeing up your working capital, providing cash within days without the need for loan and the repayment of principal and interest over years.
