AR Factoring Benefits
Cash flow is probably the most important aspect of every business. It is central to the core of business itself – you have to have cash in order to operate. You need it to buy supplies, pay staff, put toward marketing or advertising your business, and ultimately you need it in order to grow your business – become bigger and better.
When a business needs to speed up cash flow, that’s when things could become problematic. This is especially true if the business is unable or unwilling to obtain bank-type financing for whatever reason. In today’s tough lending market, it isn’t always possible to live up to the credit standards banks have set in order to qualify and receive bank financing. This is where alternative financing options like accounts receivable factoring could serve as the provider of working capital that a business needs.
Accounts receivable factoring, or AR factoring, is where a third party buys the invoices from a business up front. That third party then goes about collecting on the money owed from the invoices while the business that sold the invoices is paid cash thereby generating the working capital they require. When a business is mostly reliant on invoice billing and there are multiple unpaid invoices, it can be very easy to fall behind or come up short of the cash needed to pay suppliers and meet payroll.
And that is one of the advantages of AR factoring when your business has a lot of unpaid accounts receivable; you are paid for those open invoices up front from the factoring company. You get the cash to go about your business, pay suppliers, meet payroll and grow without the stress that comes from collection on the invoices that can sometimes age past 30, 60 or 90 days. In fact, with AR factoring you will most likely be able to grow more quickly than with traditional bank financing because most factoring companies can expand financing for you as you grow, having little to no bureaucracy that would hinder increasing your line size.
Often, getting set up with a factoring company is quick and fairly easy, going from application to approval, set-up and actively getting funded within a few weeks. Generally, it is much more difficult and time-consuming to get traditional bank funding as they perform their credit reviews of your company. Often this is done in conjunction with fiscal quarters or audit results and therefore not at your convenience. With AR factoring, the third-party providing the funding is looking more closely at the companies that owe on the invoices for creditworthiness than they are at your business. If your business is struggling with credit issues, this can be a blessing.
And AR factoring is not a loan. Your invoices are being purchased for cash. This means that you are increasing your working capital without the negative liability a loan would have on your balance sheet. Overall, going with AR factoring as a way to “finance” your business instead of borrowing can result in a lower debt-to-equity ratio which increases your credit score and your overall creditworthiness.