Accounts Receivable is an asset many businesses have yet to tap. Yes, all business owners estimate a percent paid and a percentage that may need to be written off. All businesses estimate a percent of invoices that will be paid on time, but how many compare those rates with the opportunity cost of this slower cash flow? Many businesses and industries have seen the benefit of factoring on their bottom line by gaining early access to cash, raw materials, and stock that will give them the jump on the next quarter or season.
The factor (a factoring company) pays you a percent of the invoice up front, then collects, following your standard procedures. Your client will never know the difference between paying you and paying the factor, and it reduces your workload in accounts receivable. There are actually several categories of money owed that can be factored: Accounts receivable, purchase orders, and contracts, and each of these can be factored in the standard way or with a limited recourse clause. Let’s look at each.
Accounts Receivable
When your accounts receivable seems like a mountain and your cash on hand looks like a pond, factoring can open up the flood gates enough to start moving that river of cash down stream. In manufacturing and retailing, many invoices have terms of 30, 60, 90 days, or even longer, that can leave you without access to cash for raw materials to construct new products. Meeting payroll, paying rent, marketing – all of these areas can feel the pinch – right when you need to spend to make the next period a success.
Third-party factors buy your invoices for a lump sum with a very fast turnaround. Some businesses receive a deposit within a day. Factoring removes the difficulty of working with a traditional lender who may require you to leverage fixed assets and there are no delays for required asset valuation. In addition, you won’t require a credit check to become approved. Your client’s payment history is what matters to the factor. Talk with Anchor Business Funding to begin the process today.
Purchase Orders
In many B to B environments a PO system is used to place and fulfill orders with payment upon receipt. Purchase orders, while they are earlier than an invoice in the ordering process, can also be factored. When a business holds high value purchase orders they can accelerate receipt of cash through factoring. Your clients will need to have solid credit history, but with many going businesses that utilize the PO system, it’s not the payment at issue – it’s the timing.
With PO factoring you can open an account as soon as the PO comes in. This can be helpful if you receive orders larger than your regular purchase capacity. By factoring, you get the cash now to fulfill special orders that are beyond the scope of your day to day purchase activities. You have flexibility with PO factoring, because you can choose when in the collection cycle to open the factoring account.
Purchase Orders
In many B to B environments a PO system is used to place and fulfil orders with payment upon receipt. Purchase orders, while they are earlier than an invoice in the ordering process, can also be factored. When a business holds high value purchase orders they can accelerate receipt of cash through factoring. Your clients will need to have solid credit history, but with many going businesses that utilize the PO system, it’s not the payment that’s at issue – it’s the timing.
With PO factoring you can open an account as soon as the PO comes in. This can be helpful if you receive orders larger than your regular purchase capacity. By factoring, you get the cash now to fulfil special orders that are beyond the scope of your day to day purchase activities. You have flexibility with PO factoring, because you can choose when in the collection cycle to open the factoring account.
Contract Financing
Many seasonal businesses rely on contract financing to balance out cash flow throughout the year. Contracts can be sold before a season starts, but that may also be at the lowest cash flow of the year. Contract financing can accelerate your cash flow, helping you to do more business.
When your business sees annual fluctuation, examine your annual contracts to determine if contract financing can help you level your cash flow, retain workers, expand business and move smoothly throughout the year. One difference between contract financing and other types of factoring is that contract financing, instead of a lump sum, distributes the revenue across the year, allowing you the consistency you are looking for throughout the year.
Limited Recourse Factoring
In many traditional factoring contracts is shared liability. If your client fails to pay, your business owes the money you received back to the factor. If clients go bankrupt or otherwise leave you holding the bag, that can create a difficult situation. Limited recourse factoring provides a greater balance of risk.
A limited recourse factoring agreement secures a portion of the invoice, reducing your risk. You and the factor share the responsibility. You keep your portion paid at the time of the sale, but in exchange, you may pay a higher fee on successfully paid accounts. This can be a sound strategy with new or unproven clients.
Limited Recourse Factoring
In many traditional factoring contracts is shared liability. If your client fails to pay, your business owes the money you received back to the factor. If clients go bankrupt or otherwise leave you holding the bag, that can create a difficult situation. Limited recourse factoring provides a greater balance of risk.
A limited recourse factoring agreement secures a portion of the invoice, reducing your risk. You and the factor share the responsibility. You keep your portion paid at the time of the sale, but in exchange, you may pay a higher fee on successfully paid accounts. This can be a sound strategy with new or unproven clients.
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