Accounts Receivable Factoring is the new Small Business Bailout Plan
Small businesses no longer have to be victims of their own success. What is known as accounts receivable factoring can provide many small businesses with their own bailout plan to survive through these tough times.
Businesses facing what the government is calling “immediate hardship” can apply for loans of up to ,000 through the Small Business Administration’s America’s Recovery Capital (ARC) program, as part of President Obama’s bailout strategy. The terms include no payments for the first year, and no interest, however not everyone qualifies for ARC.
On the other hand, accounts receivable factoring, or invoice factoring, can provide many small businesses with their own bailout plan to survive through these tough times. Invoice factoring provides short-term working capital, and is an extremely fast way to turn accounts receivables into cash. This can put a small business suffering hardships from the economic downturn into the red, making it difficult to pay bills, and even the payroll for employees, or order new supplies needed to keep doing business.
Fortune 500 companies have not experienced as many problems surviving as small businesses, but for one or two-year old businesses that are in the heavy growth stages, the options are very limited.
As many businesses do not get paid immediately for delivered products and/or services; accounts receivable factoring benefits businesses that do not get paid for 30 to 60 or 90 days by advancing up to 90 percent against invoices. A factor looks at the creditworthiness of the client’s customers and can fund within as little as 24 hours. The company does not expect to buy 100 percent of a company’s receivables, and there are no minimum or maximum sales volume requirements.
Accounts receivable factoring has become a highly effective cash management strategy, particularly in the construction industry and for sub-contractors who often experience cash flow problems: meeting payroll, buying supplies, paying benefits and Workers Compensation. Invoice factoring allows businesses to obtain funds based on the funds they expect to have coming in, or their current accounts receivable.
Invoice factoring is different from a traditional bank loan or the SBA-backed ARC loan in that bank loans involve two parties, while factoring involves three parties. Banks usually base their decisions on a company’s credit worthiness, whereas factoring is based on the receivables’ value. Factoring is not a loan – it is the purchase of a financial asset, or the receivable.
Factoring companies typically look at the creditworthiness of a client’s customers and pays within as little as 24 hours. Factors don’t expect to buy all of a company’s receivables, and there are no minimum or maximum sales volume requirements. The professional rates are competitive because each client’s circumstances vary, which may have an impact on the fees charged. This allows choices of invoices to be factored, enabling customers to retain most of their money, while spending the minimum fees to guarantee adequate cash flow.
Standard accounts receivable factoring has been around for more than 4,000 years. Factors begin the single invoice factoring process with due diligence that typically takes one to two business days. Once completed the client is at liberty to offer invoices to IFG for purchase. After getting the invoices, the factor checks the credit of the debtor named on the invoice and makes sure that the sale represented has been completed. The debtor is then advised of the purchase by the factoring company and the client receives their funding. At the end of the credit period, the debtor completes the transaction by paying the factoring company directly.
Kristin Gabriel is a writer who works with The Interface Financial Group (IFG), North America’s largest alternative funding source for small business. The company provides short-term financial services such as invoice factoring to clients in more than 30 industries. IFG offers expertise in accounting, finance, law, marketing and banking. Go to www.ifgnetwork.com to learn more about accounts receivable factoring.
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