Account Receivable Financing

Quality and obtainable receivable financing can be the lifeblood of any business. Since customers and clients have many vendor choices, they will often buy from those who offer the best credit terms. Any business must first be in a position to advance the credit requested, and subsequently be prepared to turn the resulting invoices and purchase orders into cash. While bank sponsored receivable financing may be preferable to some, it is very difficult to obtain and may be burdened with difficult conditions and procedures. Those businesses that desire instant liquidity should consider the use of a factor.

Factoring is a relatively simple concept. Company ABC offers to sell $5000 worth of product to Company XYZ. XYZ likes the price but wants 60 days to pay. ABC wants to sell the product, but must meet its monthly expenses. If the majority of ABC's customers demand 60 day terms, ABC can encounter a cash flow crisis. The use of a factoring company, however, can quickly solve this problem, as the factor will quickly advance a large portion of the amount of a qualified invoice to the vendor. The customers get the product, the vendor gets paid, and the factor receives a small commission on every invoice.

In actuality, the factor purchases the outstanding invoice from the original vendor and the customer is instructed to pay the factor directly. The factor will make sure that the product was indeed delivered to the customer and may do a simple credit check to make sure the end customer is legitimate and reliable. After these conditions are met, the factor will usually wire a large percentage of the invoice to the vendor. A small amount may be held back until the terms of the invoice have been met, and the factor's commission will be deducted from the initial payment.

New businesses may be ecstatic when they land a sale to a large Fortune 500 company, but their excitement may soon turn to apprehension as they discover that their new customer demands 60 or 90 day terms. When a trip to the bank yields no receivable financing, the vendor begins to wonder how they will survive for up to 90 days with little cash flow. Factoring is a great answer to this problem. Although some businesses will at first be wary about a small per invoice charge, savvy entrepreneurs continually use the factoring process as a springboard to quickly grow their businesses.

All successful business owners know that solid cash flow is the absolute key to continued success. The recession that began in 2008 quickly devastated traditional credit markets and many small businesses starved and died. The option of factoring provides a solid alternative method of receivable financing which can help ensure the success and growth of any business that faces a cash flow issue.