Accounts Receivable Financing Simplified

By: Kris Koonar

Accounts receivable financing is another name for factoring. It simply means selling your slow paying invoices at a discount to a factor in return for immediate cash. Factoring improves your cash flow and greatly simplifies your accounting process because once you factor your receivables i.e. sell your invoices, the factor becomes the owner and the invoices then reflect on the factor's books of accounts. The collection of payment related to the invoices is also taken care of by the factor and you are free to concentrate on growth and expansion of your business.

Accounts receivable financing is nothing new and has been around for a long time. Earlier it was only big and reputable companies who could take advantage of this type of financing. When growing competition and stiffer lending norms made it difficult for medium and small companies to obtain financing by traditional methods through banks and other lending institutions, the financial industry gradually extended this type of financing to small and medium companies also.

Necessity of accounts receivable financing is experienced by all businesses which sell their products/services on credit and are constrained to wait for payments for 30, 60 or even 90 days. This leads to a negative cash flow situation for these businesses and they start experiencing severe cash crunch because they need to meet regular and essential business expenses like payroll, purchases, taxes, etc. In many cases such problems can be so severe that they may put a company out of business.

Bank financing is hard to come with many formalities to be completed and hosts of documents and reports to be submitted before a case for financing can even be considered for approval. However, all this still does not guarantee approval when the bank looks into their business records or past performance that has not been satisfactory.

Accounts receivable financing approval is a complete turn around. It does not operate on such principles. In fact the credit history of the seller of the invoices is of little consequence, if at all. Factors take into account the creditworthiness of the clients/customers who have to make payments against invoices. If the customer has a good reputation for timely payments then accounts receivable financing approval sails through even for those with a low credit rating/history.

Required documentation is simple and easy to greatly simplify the financing procedure and makes factoring finance approval opportunities very high. Factors also maintain their own databases of credit worthy companies and help their clients in researching companies to get to know their reputation before they decide to do business with them.

Accounts receivable financing offers other advantages which bank finances do not. It takes much less time for accounts receivable financing to be approved, to be set up and financed. A typical time frame for setting up an accounts receivable account with a factor would be just seven to ten business days. Once an account is set up, it merely takes 12 to 24 hours to credit an account against a factored invoice. The 1.5 to 3 percent factor's fee is also nominal when you consider the enormous advantages available to a business to continue its normal business activities which otherwise may grind to a halt due to cash flow problems.

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