Accounts Receivable Factoring Can Provide Working Capital

Accounts receivable factoring can turn invoices that are on the books into ready cash, often within 24 hours. Credit-worthy invoices can be sold to a factor, which is a financial organization that buys invoices from companies that need cash for many different purposes. Getting a bank loan can be an involved process that takes a lot of time to negotiate. Many companies may be denied a bank line of credit in tough economic times.

Others choose to sell invoices at a discount because they can use the immediate cash to invest and earn greater returns than they would get if they waited for the invoices to be paid. There are mutual benefits for the arrangement for both parties that include the following.
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<li>The company selling accounts receivable pays no up-front fees for the service.</li>

<li>No co-signer or other collateral is required.</li>

<li>Decisions can be reached very quickly.</li>

<li>Companies can choose which accounts to transfer to a factor. There are no minimums or maximums, and no long-term commitment is necessary.</li>

<li>The selling company gets immediate cash. The factor gets a commission and interest on the loan amount.</li>

<li>If a greater sum of money is collected than was borrowed from the factor, the factor will return the difference to the company, less any applicable fees and commissions.</li>
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There are some factoring agreements that vary in terms. Some factors assume all collection efforts for the accounts, but other agreements specify the original company continues collection efforts in the factors name until the loan has been repaid. These agreements can also be recourse or non-recourse. A recourse agreement will require the original company to pay the full amount of invoices that are not received by the factoring agency within 90 days.

Accounts receivable factoring with a non-recourse arrangement means that if the client being billed cannot pay due to insolvency, the original company does not have to worry about repaying the invoice to the factor. However if the billed company is not insolvent, but simply slow to pay its bills, then the borrowing company will have to pay the invoice and reassume responsibility for the debts collection.

Many businesses have variable cash flow throughout the year. This is especially true of manufacturers that supply goods that are sold seasonally. During periods of poor cash flow they may require ready cash to finance operations until the proper season arrives. These companies can benefit greatly from accounts receivable factoring.

Typically, the factor provides anywhere from 70-85% of the value of the accounts as a loan. They charge interest and a basic commission. Depending on the agreement, they may or may not handle collections of the accounts. Once the original loan and fees have been satisfied, the borrowing company will receive any additional collections on their invoices. Factors make funds available even when banks refuse to do so. They can make this decision because they analyze the credit-worthiness of the accounts receivable, and can take a reasonable risk, especially if they are protected by a recourse agreement.