There are a number of reasons why many small business have turned to factoring to boost their cash flow, and to maintain their day-to-day operations when revenue sources simply are inadequate for maintaining operations. Companies which have made use of factoring have found it to be extremely useful, because they can receive needed money very quickly, as opposed to waiting for the 30 or 60 days specified by invoice terms.
In one of the most common forms of factoring, accounts receivable factoring, a company would sell a number of its invoices to a factoring company for a percentage of the actual value of those invoices, generally between 70% and 90%. Once the factoring company collects the money from those invoices and the customers that are named in them, the remaining percentage amount is returned to the selling company, minus the factoring fee charged by an alternative lender.
Benefits to a startup
New companies and startup companies have found the service to be particularly appealing, because they lack the credit history and the business history to be approved by any kind of conventional lender. An alternative lender on the other hand, will approve accounts receivable financing for even a startup company, as long as the customers named on the invoices have good payment history themselves, and can be relied upon for prompt payment.
Less staffing for a company
Another significant benefit of using accounts receivable factoring is that the company selling the invoices is actually shifting the responsibility for collecting on those invoices to the alternative lender. That means that it is not necessary to have a large Accounts Receivable Department which would be responsible for sending out notices to customers for payment, or for following up on collections. Since that’s all in the hands of the factoring company, it could conceivably be worthwhile for the selling company to reduce staff in the A/R department.
Faster and less paperwork
Some companies prefer accounts receivable factoring to traditional bank loans, even if they are eligible to be approved for bank loans. In addition to the faster turnaround on receiving cash through factoring, there is always far less paperwork associated with arranging for A/R financing, as opposed to the mountains of paperwork necessary in a bank loan transaction.