How Accounts Receivable Factoring Works to Improve Cash Flow

Many companies face shortages during the startup phase, especially in today's economic environment. Then there are the others who don't have the cash they need to grow their businesses.

Improving your cash flow in the year 2010 should be a priority, as well as collection efforts or even getting professional assistance with financial forecasting. However there is one tactic that works every time: accounts receivable factoring.

When these options are not enough, factoring can help. The practice of selling accounts receivables, or invoices, in exchange for instant cash, is a relatively quick and easy solution for any cash-strapped company. After all, why wait for 60 or 90 days, when if you had the money now, you could turn out more orders, purchase much needed supplies, and in general, keep the business churning.

Factoring does come with a price, but in the growth stages of a small business, it is better than a loan. Factoring companies, just like any commercial financial institution, charges a fee for its services.

Here's how accounts receivable factoring works: first the factor like The Interface Financial Group (IFG) will want to examine your invoices and also check the creditworthiness of your customers. You should be prepared to show the following documents: - A current financial statement; An accounts receivable aging report; A certificate of incorporation or partnership agreement; - Proof of insurance, invoices and other business documents.

Factoring companies take on the responsibility for collecting your receivables, so they will want to make sure your customers pay their invoices in a timely fashion. Once you know which invoices the factor will purchase the factor will typically pay you in as little as 24 to 48 hours.

For example, the factor might pay you 80 percent of the total amount of your invoices and then reimburse you the other 20 percent when your customers pay their invoices. They of course will subtract their fee.

Typically you’ll pay anywhere from 3 percent to 7 percent or more of the total the factor collects. Factors' fees vary depending on the size of your invoices, your customers' creditworthiness and the number of days in your cycle - for example, 30, 60 or 90 days.

Accounts receivable factoring is not for everyone. First of all it is limited to B2B companies. Secondly, you will almost surely pay a higher interest rate for the funds than from a traditional bank loan. However, since most factored invoices are paid for within 90 days the total amount of interest paid is generally less than that of a longer term bank loan.