Accounts receivable factoring has offered capital solutions for businesses for decades. Prior to the Great Recession that started around 2009, bank financing was considered the route to take to obtain capital. While borrowing from banks has always been a problem for new businesses without an established credit rating or thin financial statements, the post recession lending climate has grown even more restrictive forcing companies to turn to other means for obtaining capital.
How Factoring Works
The way factoring works is that a company pledges its accounts receivable assets to a factoring company in exchange for a cash advance. This arrangement releases the funds that are tied up in receivables for cash flow purposes to pay operating expenses. The relationship can be established for ongoing cash advances and is often integrated into a company’s business model as a strategic way to manage accounts receivable assets.
Factoring Companies Fuel Growth Opportunities for Small Businesses
Factoring solves a growing problem that many businesses experience. That problem is the problem of having so much working capital tied up in receivables. Larger companies with large orders can leverage their power in the market place to stretch out paying for as long as possible. This practice is part of the problem. Smaller companies that want to do business with larger companies must be able to hold out for longer than a normal 30-day cycle to receive payment. Unless business managers can solve this financial conundrum, these small businesses are unable to take on larger orders from major players that make a longer payment cycle a condition of doing business together. Accounts receivable factoring companies offer the solution to this common cash flow problem.
A Comparative Analysis of Factoring Versus Borrowing
One of the reasons company financial managers have long favored borrowing versus factoring is because factoring is not well understood by everyone. While going to the bank to get a loan is the first solution that most business managers think of immediately in times of need, factoring is a term that is quite possibly a mysterious idea that intimidates managers. The interest rate paid for factoring is higher than traditional financing, which is yet another reason many financial managers do not fully evaluate this option.
What business executives often discover once they finally decide to take a hard look at factoring is that they are paying for more than money when they obtain a cash advance. Without applying over and over again, a business can continue turning in approved invoices for future cash advances to solve the cash flow problem for the long-term instead of “for the moment.” Small businesses are typically approved as long as they have accounts receivable assets of value. By taking a closer look at accounts receivable funding, business executives realize they have gained a partner that manages the accounts receivable function in many cases.
The author writes business and finance articles for publication and is now writing for Universal Funding Corporation on a regular basis. With a resume of over 250 articles written specifically for the Internet, cash flow management is a major topic of interest.