Small business owners no longer have to be victims of their own success. With factoring (or accounts receivable factoring), small entrepreneurs are given a silver lining in times of dark clouds.
Many businesses that are facing what the government is calling "immediate hardship" can apply for loans of up to $35,000 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 is eligible for ARC.
With accounts receivable factoring or financing, on the other hand, small businesses are provided with short-term working capital by transforming their accounts receivables into immediate cash. This can place a small business suffering hardships from the economic downturn into the red, making it difficult to meet payroll for employees, order new supplies needed to keep doing business or even the most basic bills. The "birth pains" are truly challenging for small businesses who are in the heavy growth phases.
In many cases, small businesses don't get paid for delivered products until after 30, 60, or 90 days. Accounts receivable financing benefits businesses that don't get paid by advancing up to 90 percent against invoices. A factoring company checks the creditworthiness of the client's customers and can fund within as little as 1 day. The company asks no minimum or maximum sales volume requirements and can purchase invoices up to 90%.
Accounts receivable factoring has become a truly effective cash management strategy, especially in the construction industry and for sub-contractors who usually experience cash flow issues: meeting payroll, buying supplies, paying benefits and Workers Compensation. Factoring allows businesses to obtain funds based on the funds they expect to have coming in, or their current accounts receivable.
What separates invoice factoring from bank loans and SBA-backed ARC loans is the fact that the former requires three parties, and the latter, 2. Also, factoring companies base their decision on the value of the receivables; banks, on the client's creditworthiness. In simpler terms, factoring is not even a loan - it's a purchase of an asset.
What makes factoring companies more handy is the fact that they pay in as little as 24 hours after ensuring the client's customers credit worthiness. There are no minimum/maximum sales volume requisites and they don't expect to buy 100% of the company's receivables. Rates are also competitive - and are highly dependent on the client's special situation. The program allows choices of invoices to be factored, enabling customers to keep most of their money, while spending the minimum fees to assure adequate cash flow.
The idea of factoring has been present for over 4,000 years now. The process begins with the exercise of due diligence - typically taking 1-2 business days. Once this is done, IFG provides the client with the freedom to select which invoices to sell. Then, the credit of the debtor on the invoice is assessed to make sure that the sale represented is satisfactorily carried out. Once this is okay, the debtor is informed of the purchase by the factoring company and the client gets their funding. At the end of the credit cycle, the debtor completes the transaction by paying the factoring company directly.
In summary, getting a government ARC loan will not be such a bright idea in the long run as payment still has to be made. With accounts receivable financing, however, small businesses are prevented from getting a loan because they are given the chance to transform their receivables into immediate cash.
Learn more about accounts receivable factoring by calling the Interface Financial Group (IFG) at 877.210.9748.
This article was added on Sunday 29 November, 2009.
