Taking the AR Factoring Plunge

Taking the AR Financing Plunge Is Account Receivable Factoring for You?

By Darrell Zahorsky, About.com

As a small business owner, you know first hand the struggle of attaining capital to finance the growth of your business or meet cash flow shortages. When regular small business financing such as loans and credit are limited, some business owners will turn to AR financing. Is accounts receivable financing right for your business?

What is Accounts Receivable Financing?

Accounts receivable financing is the selling of outstanding invoices or receivables at a discount to a finance or factoring company that assumes the risk on the receivables and provides quick cash to your business. The amount of value assigned to the account depends on the age of a receivable. A more current invoice will pay more. Any accounts receivable over 90 days typically are not financed. Accounts receivable financing is also known as accounts receivable factoring or accounts receivable funding.

Benefits of Accounts Receivable Financing

Pass off Collections: Outsourcing your accounts receivable management to another company, frees up your resources to focus on other more productive activities such as selling.

Free up Working Capital: Many companies have the majority of capital tied up in inventory. Accounts receivable funding allows a company to free up capital tied up in inventory.

Quick Financing: Accounts receivable factoring will not require a business plan or tax statements. It's a quick form of cash often used for businesses experiencing a cash crunch.

While these are some of the many benefits to factoring your accounts receivable, there are potential drawbacks to using this method to finance your small business. One of the biggest factors of accounts receivable financing is the cost. A 5% discount fee and other charges might not seem high this month, but over the course of a year the costs can greatly exceed the interest on bank credit or a loan. Rates will vary among companies shop for the best deal and contract.

Before you embark on using accounts receivable financing for your small business, consider the following questions:

  • Is the money needed necessary for your company survival, or moreover to take advantage of an opportunity?
  • How does this financing strategy match with your business plan? If you have no business plan, put together a plan prior to taking on additional money.
  • Is your business ready for more money and expansion?
  • Have you explored all possible sources of small business financing?
  • What are the current economic and industry conditions? Is now a favorable time to finance? Taking the accounts receivable funding plunge can be the difference between company survival and bankruptcy. Carefully consider all your options. The factoring industry is not as regulated as banking. Spend the necessary time to investigate the companies you are working with. Inspect contracts and negotiate discount rates. In the end, using accounts receivable financing can buy time to eventually qualify for a regular credit line from your bank.

    • * this article from Small Business Information no longer has a live link.  This was an exact copy of the article as it existed.

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