Can Your Open A/R be Turned into Working Capital?
A/R Funding to Fix Cash Flow Issues
Table of contents
- Can Your Open A/R be Turned into Working Capital?
- A/R Funding to Fix Cash Flow Issues
- What is invoice or A/R Factoring?
- Why use an Invoice or A/R Factoring Company?
- Seven Reasons Companies can benefit from using invoice factoring in the following scenarios:
- 1. Cash flow shortage from commercial customers
- 2. Small companies, Family-owned companies, and startups
- 3. Unable to qualify for traditional financing
- 4. Out of covenant with current loans/lenders
- 5. Lack of Credit Worthiness
- 6. Turnaround situations
- 7. Bank offers a line of credit but only a fraction of your Good Accounts Receivable Aging
- How does A/R factoring work?
- How much are Factoring Costs & Fees?
Factoring, also known as Account Receivable (AR) Financing, A/R Factoring, and Invoice Factoring, helps businesses extend customer payment terms. Companies waiting 30-90 days to receive payment can run low on cash to sustain daily operations and financial obligations. Thus, Factoring allows our clients to have adequate funding to continue the business.
There are many reasons why companies need capital from invoice factoring. Clients must meet payroll, taxes, inventory purchasing, strategic projects, marketing campaigns, and other general expenses.
What is invoice or A/R Factoring?
Factoring provides clients with an advance on your accounts receivable (AR), improving your cash flow. Invoice factoring solves your cash flow shortage and offers immediate funding for your expenses. Typically, factoring companies purchase an asset – the accounts receivable – and buy the proceed rights to their client’s invoices and provide direct funding in exchange.
You can also read our article on invoice factoring versus a bank line of credit.
Why use an Invoice or A/R Factoring Company?
Seven Reasons Companies can benefit from using invoice factoring in the following scenarios:
1. Cash flow shortage from commercial customers
The main reason to use invoice factoring is to increase cash flow due to customers with 90-day payments.
It can be challenging for companies with limited cash reserves or business lines to grow the business. The immediate funding, the same-day 97% of the time at Banker’s, provides the capital to meet operating expenses.
2. Small companies, Family-owned companies, and startups
A/R factoring offers a high-quality product to smaller-sized companies with cash flow problems.
Especially if your business does not qualify for traditional financing through a lender or the Small Business Administration, invoicing factoring is more accessible than conventional lending. Small businesses looking for a factor need strong credit from their customers, as these are the receivables to be sold to the factoring firm. Startups and growing companies often have large commercial clients.
3. Unable to qualify for traditional financing
Loans and lines of credit are the most cost-efficient financing available to most companies. And in many cases, they are the best solution for a company. Conventional bank financing requires a business to maintain clean and adequate financial statements, a strong reputation in the marketplace, established credit, and the owner not to be deemed a risky borrower.
Receivable factoring is an option for companies that cannot obtain conventional financing. In short, to qualify, the client needs creditworthy commercial clients, solid internal processes around A/R’s, and invoicing documentation.
4. Out of covenant with current loans/lenders
Loan covenants place requirements on borrowers to maintain the line of credit, which is difficult even for good companies. Such strict covenants do not provide the flexible credit facility most small businesses need.
Seasonal businesses or preparing for the season by purchasing products can make it challenging to maintain the rations of covenants. Accordingly, the financial statements have swings of highs and lows and appear less attractive.
More importantly, most factoring firms and their lines have no covenants. This is another reason factoring can be an excellent answer for companies with flexible needs.
5. Lack of Credit Worthiness
Traditional lenders are looking for business owners with strong personal credit. In many cases with smaller businesses, there might be derogatory marks on their owner’s credit. However, factoring companies and their less stringent qualification requirements focus on your customers, your invoices to them, and their creditworthiness.
You can also read our guide to acquiring a factoring line with bad credit.
Companies that have “less-than-perfect” credit can obtain factoring lines.
Invoice Factoring companies have much less stringent requirements than a bank. They focus more on the quality of your customers rather than on your personal credit. Companies whose owners have “less-than-perfect” credit can usually qualify for A/R factoring.
For example, a recent bankruptcy is a disqualifier for most traditional lenders. With invoice factoring, a company can still meet the factoring requirements.
6. Turnaround situations
Bringing companies back up after failure is not an easy feat for management. Their finances are poor, making it hard to obtain financing. Invoice factoring is a logical option for companies in turnaround situations. The cash flow from the factor provides liquidity to the company as it works to qualify for traditional financing.
7. Bank offers a line of credit but only a fraction of your Good Accounts Receivable Aging
We have all heard the old joke that banks only lend money to people who don’t need the money. That is close to being true. Many times, we see a client with $500,000 in solid accounts receivable from large creditworthy companies, and a bank only offers them a $100,000 line of credit-or, just enough money to go bust.
Factoring might cost more, but if Bankers Factoring offers you $425,000 of credit-protected funds versus $100,000 from the bank, I am sure you can think of ways to grow your business and increase profits with four times more working capital.
How does A/R factoring work?
Factoring provides a line to clients with slow-paying invoices from commercial clients. Often, the credit or payment terms are 30 to 90-days (forced on you by big companies); rather than wait for payment, the factor pays you immediately 80-90% of your invoiced amounts.
By turning unpaid invoices into working capital, this payment provides you with the funds to run your company. The financing transaction settles when the customer pays the invoice in full. Your customer still pays on their usual schedule.
Factoring firms (factors) buy your invoices in two installments, the cash advance and the rebate. The advance covers up to 90% of the invoice with immediate funding. Once your customer pays, the factor returns the second installment to cover the remaining balance and less the factor fees – the rebate or return. This payment settles the transaction for that invoice.
Factoring transactions follow these steps:
- The factoring firm client delivers the goods or services to their customer.
- The Client submits an invoice(s) for invoice financing.
- The factoring company advances the first installment of 80-93% of the total invoice amount.
- The client’s customer (Account Debtor) pays according to their payment terms. The factor collects payments.
- The factoring company issues a rebate of the difference of the remaining balance, less the factoring fee. This is known as the earned reserve.
How much are Factoring Costs & Fees?
Factoring costs vary based on the size and scope of the client and the credit risks. The fees may vary based on industry, the company’s Accounts Receivable value, and their customer’s credit quality. Moreover, the cost of factoring can range from less than 1% up to 3.5% per 30 days. These factoring costs can be pro-rated and scaled down as you grow.
What industries use an A/R Factoring Company?
Accounts Receivable Factoring is used by most industries that work with commercial or government clients.
- Trucking, Transportation, and Logistics
- Staffing Firms and Agencies
- Healthcare and Medical
- Consumer Goods
- Wholesale and Resellers
- Wine & Spirits
- Food & Beverages
- Telecom & Cable
- Importers & Jobbers
- IT Companies
Why do large companies and small business owners use A/R Factoring from Bankers Factoring? It is the safe and fast way to turn your 30 to 90 day old outstanding invoices or your accounts receivable into working capital. Let us wire money into your bank account to pay employees today.