What is Accounts Receivable Factoring ?
What is accounts receivable factoring and how it can help your business?
I pursued factoring few years back when I was looking for growth funding to expand my business. I had already been in business for a long and successful 18 months, with a proven solid track record.
Despite strong business performance, lenders like banks and the Small Business Administration (SBA) denied me loans repeatedly.
I don’t blame them. Credit was tight across the globe.
Accounts receivable factoring is an alternative financing strategy that can cost a bit more than a traditional bank loan, but provides the immediate access to cash that your business may need, whether it is working capital or expansion related.
Most businesses have customers that buy on credit. In my business, I had customers who would purchase from me on credit terms of up to 60 days out. That meant I sold goods that I paid for today for a promise to pay me back 60 days later.
That means for 60 days, I don’t have access to the cash that I used to purchase the goods I sold. Unless you have a lot of excess cash or working capital sitting around, it is hard to fund this type of sale on an ongoing basis, especially if you plan on expanding, which means more sales on credit.
This is where factoring helps.
There are factoring companies (called Factors) that offer to pay you the cash today in exchange for the customer receivable.
They make money from the spread resulting from what they offer to pay you vs. what your customer owes you.
Savvy business owners use this alternative finance strategy to their benefit by building in a spread of their own in their product margins upon sale.
For example, if the Factoring company is charging an effective rate spread of 3% on the transaction, a savvy business owner might pass that 3% straight on to the customer by either increasing the price of products sold or decreasing the discount offered t the customer.
There are many accounts receivable factoring companies that have evolved in just the last few years as this type of financing has become increasingly desirable, particularly for small to mid size businesses that are having a difficult time raising capital to fund their business growth. I only expect this trend to continue in the next few years.
I hope I have answered what is accounts receivable factoring adequately in this article. To get further acquainted with the topic, you can read more about what to look for in a typical accounts receivable factoring agreement or is accounts receivable factoring safe for your business.