Accounts Receivable Factoring Solutions
What are some of the pros and cons involved when considering accounts receivable factoring solutions?
Aside from the discount rates, account set up fees and costs involved, there are other advantages and disadvantages involved when considering an accounts receivable factoring agreement.
This is my attempt to very briefly some of the key highlights based on my experience having been involved with accounts receivable factoring for a few years now.
Quick access to cash, usually in less than a week.
Depending on your relationship with the accounts receivable factoring company you are doing business with, you may get the funds within 24 hours.
That is fast!
1) Accelerating cash flows enables you to invest more and quicker back into your business. It also allows you to expand even when you don’t have the physical hard cash on hand.
2) In many cases, small businesses find that they can raise more cash flow from accounts receivable factoring than they can through a bank loan or an SBA – small business administration loan.
In fact there are some industries banks and financial services firms won’t lend to. However, there are accounts receivable factoring companies for all sorts of businesses.
3) You rid yourself the headache of collecting from your customer. You can look at the rate you are charged by factoring companies as the cost you would pay an employee to handle accounts receivables for you.
And now for the bad news. Not everyday is a sunny day in factoring land.
1) Depending on your customer type and industry, you may have to shell out more cash in forms of higher discount rates of factoring fees. This is especially true if you have slow paying clients and customers, and are in a higher risk industry (i.e. retail clothing).
2) Chances are you will have to pledge a collateral, or enter a recourse agreement, which means that if your customers don’t pay the factoring company, the company takes your collateral or asks you to satisfy payment in full.
This can suck big time, so understanding your customer is critical when factoring. Oh, they will also charge you additional fees and of course the interest rate.
3) Depending on your factoring track record over time, factoring companies can raise your fees and discount rates. Of course you can also reverse this trend if your business performs better in the future. Make sure you renegotiate fees when business is good.
There is no magic wand in life, especially for an entrepreneur running a business. Same holds true when evaluating accounts receivable factoring companies.
Understand the pros and cons involved, and whether accounts receivable factoring solutions are right for you. There are many benefits, but there are also some downsides to consider.
Wishing you all the best,