Leveraging accounts receivable to release cash to fund business has been common practice for centuries. An increasing number of CFO’s are turning to receivables-based financing because they have a higher reliability than a line of credit. Accounts Receivable (A/R) Financing or Factoring typically costs more (sometimes 30-40% more than an unsecured bank line), has more stringent reporting on accounts receivable and collections and provides less flexibility in negotiating terms with customers, but in today’s economy, CFO’s find the reliability to be much more important. They know when they get in a bind or have an unanticipated problem that the asset-based lender will be there for them. Factors provided $140 billion in financing in 2009 showing a slight growth over 2008.
What is Accounts Receivable (A/R) Financing?
A/R Financing or Factoring is a form of working capital where the bank advances money to you based on your outstanding accounts receivable. The bank essentially purchases your accounts receivable at a discount. Most banks will advance up to a specific percentage of your accounts receivable to you. When the bank collects the payment from your client, they will take their fee from those funds and you get the balance. A/R Financing is not a loan.
A business who is selling to another business or the government on terms could qualify for A/R Financing. Approval for A/R Financing does not focus on your credit worthiness or the strength of your financial statements, yet the credit worthiness of your customers and the strength of your accounts receivable. Factoring is used by all sizes of companies needing cash to support rapid growth, firms with seasonal peaks and valleys in their business cycles, companies undergoing a restructuring, and start-up companies. Many new businesses use factoring that do not yet qualify for a bank line of credit. Some companies use factoring services for 12-18 months and then, as they strengthen their business credit, turn to bank financing once they qualify. Companies as large as Belgium-based InBev, who bought U.S. beer king Anheuser-Busch in July 2008, use A/R Financing when they hit a cash flow crunch. If your business lacks history, is growing fast or is distressed, A/R Financing could be a perfect for you.
Top Industries Using A/R Financing
Some of the largest industries utilizing A/R Financing today are transportation, temporary staffing, wholesale/distribution, manufacturing, other services, construction and third party medical. Many businesses that sell to other businesses on credit terms of less than 60 days can also use Factoring.
The Benefits of A/R Financing
A/R Financing can help you make payroll on time, get discounts from suppliers for quick payment, pay taxes on time, pay bills on time and fund growth. Factoring can offer a lot of support to your business as well. New and smaller businesses in particular use factoring because factors act as their credit and collections department. The factor will evaluate potential clients on strength and solvency for the business so the business owner knows they are working with the right clients. The factor is then the one who takes the loss if the client can not pay. Partnering with a factoring company may allow you to reduce overhead that comes with a back office staff.
A/R Financing can play a significant role for many businesses especially in today’s economy where banks still aren’t lending. Too many business owners are utilizing credit cards to the detriment of their personal credit and could be using factoring to gain the cash they need while keeping their personal credit in tact. The whole goal of A/R Financing is to help the business get back on their feet to qualify for bank funding in the future. A/R Financing can be used along with other finance means such as equipment leasing. AFP partners with one of the largest factoring companies in the world who has been in business over 200 years. Contact us with any questions on A/R Financing.
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