When your business is going through the cash flow challenges, then the ideal solution can be the account receivables factoring. With the help of the receivables factoring, you can sell your invoices or accounts receivable for generating quick cash. This method is a common practice adopted by businesses worldwide for centuries for managing cash flow. It offers numerous advantages that have led to its popularity. One of the biggest reasons is that it provides you immediate access to cash owed to your business. For many businesses, it minimizes the requirement of incurring debt for operations and waiting for payment of the invoices.
Another one significant advantage is that you get a smooth and consistent cash flow. Rather than thinking of when you will get the payment from the customers, you can easily predict of receiving your payment from the receivables financing company. Businesses have to wait ideally for 30 days, 60 days, or 90 days for receiving payment on the invoices of the products or services they have delivered. During these times, the funds get tied up and cannot be accessed by the businesses. But, the receivables factoring can reduce the cycles of the long bills and also increase cash flow. You can also access cash within a day, which is a significant relief to the cash flow crunches.
Qualifications for receivables factoring
Any industry, which generates invoices can use the receivables factoring. Usually, if you make payment for the materials or the labor before you receive payment from the customers, then this can help your business substantially. When your business is growing at a much faster rate than you are able to generate more working capital from a bank or a private source, factoring can definitely provide help. Moreover, if you have started a new business and unable to get bank financing then factoring is an ideal solution for you. Any company to qualify itself for receivables factoring should fulfill two necessary conditions.
The two conditions are that there should not be any existing lien on the unpaid invoices, means no other company shall have a claim when these payments come in. The customers should be creditworthy. The factoring company shall evaluate the creditworthiness of the customers, and on that basis, they pay for the invoices. There are other conditions too where receivables factoring may be the best solution. For instance, when the long billing cycles are causing a strain on the cash flow of your business or if you are concentrating too much or spending much time on collecting payments from the customers and this way, you are unable to devote time for building your business.
How does it work?
With the receivables financing company, you sell or liquidate the outstanding invoices to the company to get instant working capital. The company purchases the unpaid invoices for an advance amount that is a little lesser than the face value. When the receivables are due, the company collects the amount in full. Once this company receives the total amount, you get the remaining amount by deducting the fee. Usually, the factoring fee of the receivables is 3-5% of the invoice value.