You may have heard one of accounts receivable financing’s many used names all meaning the same financing product. From ar financing, purchasing of accounts receivable to invoice financing, factoring and invoice factoring. This type of financial product provides small business owners the ability to have capital accessible when it is most needed, when you are owed money for the services you provided and completed. This financing solution is outstanding due to the fact that the company receiving the advance is not the company under pressure to repay the advance, the company paying the invoice is the company responsible taking a weight off of small business owner’s shoulders, and it may truly solve your problems.
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Factoring Accounts Receivable
Factoring, also known as a/r financing or accounts receivable financing allows small business owners to secure capital against their unpaid invoices or accounts receivables. Factoring is not a loan but more like a sale of a future invoice, asset, or sale. Small business owners sell their accounts receivables to a factoring company who then in turn collects the payments from your customers who owe the funds. How the payment works is a percentage of receivables is received in the beginning and the rest of the balance when the invoice is paid. Of course, the fee to the factoring company is paid once the balance of the invoice is paid.
Factoring, or a/r financing turns the accounts receivables of your company into liquid, tangible, cash. To better understand factoring, think if your business has $150,000 in receivables that have not been paid yet. Those invoices are sent to your factoring company and your supplier. You will be funded a percentage of your invoices, generally between seventy-five and ninety percent. The percentage of invoices funded depending on a mix of different factors, such as quality of the account receivables, as well as age of the receivables that have not been paid. If the companies who have been billed are of high quality like Lennar, or Walmart, the percentage funded out of your invoices will be much larger.
Once the factoring company holds the invoice of the unpaid balance, you will hold the percentage that has been paid out by the factoring company, and the customer owing your invoice will pay the invoiced amount to the factoring company. As soon as the customer proceed to pay off the invoice, the factoring company will pay the small business the remaining balance of the invoice (minus fees etc.).
Get paid on a net thirty, net sixty, or net ninety payment schedule? Do you need capital to keep operations running right now before your invoices are paid by your customers? If you are a small business owner in this situation you should definitely do some research on the best factoring companies on the market.
These companies will proceed to inspect your client book, see who owes you payments, and analyzes their risk dependent on the credibility of the customers with outstanding invoices. Rates for invoice factoring are generally more generous when compared to a merchant cash advance or unsecured business loan depending on which tier your business qualifies for.
The Different Types of A/R Financing
As per Investopedia:
Accounts Receivable Financing:
“Accounts receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — as collateral in a financing agreement. In this agreement, an accounts receivables financing company, also called a factoring company, gives the original company an amount equal to a reduced value of the unpaid invoices or receivables.
This type of financing helps companies free up capital that is stuck in unpaid debts. Accounts receivable financing also transfers the default risk associated with the accounts receivables to the financing company.”
Purchase Order Financing
As per Paragon Financial Group:
“Purchase order financing is a funding option for businesses that need cash to fill single or multiple customer orders. In many businesses, cash flow problems exist. There will be times where there is simply not enough money available to cover the costs of doing business. As a result, there may be an order from a client that isn’t able to be fulfilled due to a lack of cash. A company may not be able to afford the supplies necessary to meet the client’s particular needs. Having to turn the order down would obviously mean a loss of revenue and perhaps even a tarnished reputation.”
As per Investopedia:
“Inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume – for example, by allowing a business to acquire extra inventory to sell during the holiday season.”
Asset Based Lending
As per Investopedia:
“Businesses usually take out loans to meet various cash flow needs of companies, for example, meeting payroll or building inventory. When a company cannot show that it can pay for a loan through its cash flows, the lender may decide to approve the loan based on the value of the entity’s assets. This form of business financing is referred to as asset-based lending.
Asset-based lending occurs when a loan is granted to a firm solely on the value of assets pledged as collateral. The terms and conditions of an asset-based loan depends on the type and value of assets offered as security to the lender. Lenders usually prefer highly liquid securities that can readily be converted to cash in situations where the borrower defaults on its payments. In general, the more liquid the pledged asset, the higher the loan-to-value ratio. In addition, loans that are granted under asset-based financing are never the full value of the assets pledged.”
Single Invoice Factoring
As per Lendio:
“Single invoice factoring is a business financing option that lets you advance the payment of your customers’ pending purchases. This type of financing is helpful when you are waiting for a large payment from a customer but need the money immediately. Single invoice factoring differs from regular factoring services in the way that only one invoice is advanced instead of a contracted amount of invoices. This lets you factor purchases on an as-needed basis.”
Benefits Of Using A/R Financing
Invoice factoring, or accounts receivable financing, has very unique characteristics in which provide many advantages over traditional forms of small business financing. The act of leveraging your customer accounts receivables will allow you to immediately receive an injection to your cash flow, allowing you to receive the capital that you need to finish the job. The capital can be used for all small business needs, including but not limited to, marketing, expansion, payroll, acquisition, or materials for future projects.
Once your invoices are factored, and the factoring company is handling the invoices you can continue to proceed on what you do best, run your business instead of feeling like a credit collection agency. Major benefits of invoice factoring, or accounts receivable financing include:
-AR Financing is a fast funding solution. We know you do not have time to go through the 30 day traditional bank loan process. Receive your cash next day with proof of clients (a/r report, client book)showing adequate support for the percentage of your invoice being factored.
-The unsecured Nature of AR Financing. The capital received when factoring your invoices are to be used freely as you deem fit. Other form of traditional banking financing puts restrictions on how small business owners use their funds. Funds received by small business owners have the complete freedom to use the funds however they feel will best improve their company. At the end of the day, small business owners are back in control!
-Factoring is not a credit driven product! Factoring companies do not look deeply into your aggregate credit score. Factoring companies will proceed to analyze the credit profiles of the small business owner’s client book to determine the percentage of invoices being factored. This provides great opportunity for startup companies or newer companies who do not have strong or old enough credit history to qualify for secured small business loans.
All in all, there are many reasons why small business owners choose accounts receivable funding in order to receive capital when they need it, now. This solution provides unrestricted capital to business owners who have promising clients that have outstanding invoices to be paid. To learn more about invoice factoring, visit AMP Advance’s website to receive further information about our experience in factoring with small businesses nationwide.
AMP Advance is a Miami based industry leading direct funding source out of Coconut Grove, Florida. We help those who are in need of small business financing by providing web based financing options & funding solutions. Our solutions assist small business owners find matching opportunities while assisting small business owners improve their overall financial situations. AMP Advance provides small business loans, business lines of credit, accounts receivable financing, equipment financing, unsecured business loans, and revenue based loans to millions of small business owners nationwide.