In today's economy, companies extending credit are no longer the exception to the rule, but the only rule. For the business that needs those payments to meet their own obligations, waiting can become an exercise in futility. Unfortunately, banks can't help given their high interest rates and tightening of credit limits. Well, there is a solution and it lies with accounts receivable factoring. What is accounts receivable factoring and how can it help businesses ride out the storm of late customer payments?
Factoring is a simple and straightforward way of borrowing against the value of the customer's unpaid invoice. A factoring company will provide an upfront payment on the value of the invoice. This is often anywhere from 85 percent to 90 percent of the invoice's value. Once the full amount of the invoice has been collected from the customer, the company will return the remaining 15% to 10% and deduct a small fee for their work. Seems pretty straightforward doesn't it? It is and there are other benefits.
1. Reduces the Impact of Cyclical Business
There are a number of businesses who work in industries with cyclical and infrequent demand. Cash flow isn't a concern for them all year round. However, when it is, this allows businesses to ride out the ups and downs of their given market.
2. Improves Cash Flow
With some customers taking anywhere from 45, 90 or even 120 days to pay an invoice, companies are often faced with severe cash flow issues. Proper cash flow management saves businesses money and reduces the impact of interest rates on loans and credit lines. Getting paid sooner improves cash flow and improves gross profit.
3. Saves on Financing Charges
As previously mentioned, interest rates on business loans and credit lines are not only high, but those loans and credit lines are fast becoming more difficult to secure. For the business that has already stretched its credit limit, factoring receivables is less expensive and much more reliable.
4. Professional Approach to Customer Management
When it comes to asking another company to collect on an invoice, it's important to know they'll do it in a professional and courteous manner. Accounts receivable factoring companies understand the importance of the customer/buyer relationship and will never do anything to put it at risk.
5. There are Options that can Suit Every Situation
There are two options to help businesses. Recourse factoring is where the company selling the invoice guarantees it will be paid by their customer. Non-recourse is where the factoring company assumes all the risk in collecting from the customer. Each has its benefits and each has a different payout.
For those businesses who simply can't afford to wait on those unpaid invoices, this is a viable alternative to a business loan or credit line. In addition, it's fast, secure and far less expensive.
Steve Troy is Pres of Aerofund Financial Inc a direct commercial lender specializing in providing accounts receivable management & factoring for small - medium sized businesses nationwide. Learn more visit aerofund.com
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