Generating cash flow plays an important role for every business. There are different ways to generate cash. A business can apply for a loan, sell assets or collect accounts receivables. All of these methods can be time consuming and may not generate needed cash quickly. There is an option for companies that need cash quickly. It is accounts receivable factoring.
Factoring accounts receivables is selling receivable accounts to a third party. The accounts receivables are sold at less than the amount owed. Depending on what accounts receivable factoring company used, the accounts can be sold for a range of 75 percent to 90 percent of their value.
An accounts receivable factoring company will buy certain receivables and assume the risk of collection of the account. Factoring accounts receivable is not a loan and there is no collateral needed to sell the accounts.
Although the receivables are sold for less than their worth, it still may be advantageous for a company to sell the accounts. Generating cash in this manner enables a company to maintain its everyday business needs and could actually offer long term savings.
For many types of business, a considerable part of a company’s income is generated through accounts receivable. Start-up businesses, temporary staffing agencies and manufacturing-based businesses often set up product or service contracts with individuals or other companies. Depending on how a company sets up its payment schedules, there’s typically a delay in payments for cash due on invoices for product orders or services rendered. In effect, these delays in payment tie up a company’s cash reserves. Businesses that rely on invoice-based revenue can use factoring as a way to have more control over their income earnings.
Interest on a long term loan may amount to more than what is lost by selling the receivables at a discounted rate. This method also keeps the company from incurring any long-term debt and keeps the organization’s credit in good standing.
Not every business will be able to factor their accounts receivables. There are certain criteria accounts receivable factoring companies require to purchase receivable accounts. Typically, a business must show a growth in receivable accounts. The accounts being sold must have at least a two year payment history. The business must also generate a certain amount of receivables income each month to qualify for the best factoring rates.
Before deciding if factoring is right for your organization, research available accounts receivable companies. Meeting factoring criteria will ensure the best rate for selling the accounts. Factoring accounts receivable will allow you to generate cash flow quickly and gives you the cash necessary to keep your business operating smoothly.
Other advantage of factoring accounts receivables are maintaining your organization’s credit standing, potentially saving money on interest and will keep the business from incurring long-term debt. Factoring is a viable option for an organization that needs to generate cash quickly.