Accounts Receivables Financing
When cash is tight accounts receivables financing can offer small business owners a lifeline. In a sink-or-swim economy small and large companies are finding it difficult to obtain financing to keep their heads above water. Banks usually balk at extending loans or lines of credit to companies with little or no capital, collateral, or credit rating; and the lack of financing can prohibit many businesses from expanding operations or staying afloat. But a source of instant income could be lurking right under the cash drawer: accounts receivables (ARs). Totaling sometimes hundreds of thousands of dollars in unpaid invoices, ARs represent sales that a company has already made and billed out. But unpaid invoices can create a cash flow problem when they linger on the books and cause owners to fall behind on obligations. While accountants try to enforce a 10-day billing cycle to ensure that monies owed are available for payroll and overhead; if a slow-paying customer delays payment, businesses will soon be in the red. And while owners wait for accounts to be settled, leases still have to be paid, lights have to stay on, and employees still need their paychecks. Small companies without cash reserves would soon declare bankruptcy without the aid of financial institutions which agree to buy invoices from companies that sometimes teeter on the edge of fiscal ruin.
Accounts receivables financing works something like this: Commercial lenders, called factoring companies, specialize in buying up an owner's unpaid invoices, less a specific discount, but at little risk to the owner. Based on a firm's choice of outstanding invoices, accounts receivables financing enables business owners access to ready cash without the hassle of collecting or waiting for checks to come in the mail. Factors may purchase up to 95% of uncollected receivables as long as the outstanding balances are not over 90 days old. Invoices aged ninety days and over may pose a credit risk and are not considered a wise investment for the lender who assumes the responsibility of collecting past due balances. In exchange for bailing out cash-strapped companies, lenders charge a percentage of the face value of outstanding accounts. In essence, factors become a propitiation for the debtor, winning back favor between the business owner and the customer when payments have been promptly collected. Similarly, Jesus Christ became a propitiation for mankind, winning back favor with God through His blood shed at Calvary's cross. "Herein is love, not that we loved God, but that He loved us, and sent His Son to be the propitiation for our sins" (I John 4:10).
Business owners use invoice financing not only to make ends meet during slow payment periods, but also to shore up existing revenue, acquire capital for expansions and equipment, or to fund special projects. A small company may be awarded a government contract worth millions, but lack sufficient capital to complete the project or wait 30 days or more for payment. With adequate capital garnered from unpaid invoices, the company can afford to fund the project, including getting bonded and acquiring permits, hiring subcontractors, buying materials, and paying hourly labor in compliance with federal pay scales. Accounts receivables financing companies should have no problem dealing with a reputable firm with the potential to win high paying jobs, earn income and collect promptly on outstanding invoices. Other firms put fast cash to good use by leasing vehicles, paying for domestic and foreign travel, or improving on facilities to comply with workplace safety standards.
In business, there is always a tremendous need for ready cash in lieu of high interest rates and the hassle of dealing with banks or conventional lenders. The beauty of accounts receivables financing is that lenders do not usually require owners to submit income tax returns or detailed financial statements, or hold owners hostage to high finance charges. Unpaid invoices billed to reputable and reliable customers along with an application and proof of the companys legitimacy are all that is usually required. Financing is virtually risk-free and owners incur very little debt. Factoring agents may charge certain fees, but they are really the ones who bear the burden and risk of collecting. Once agents collect on outstanding accounts, purchased at a discount, original business owners are entitled to the remaining balance. For example, invoices totaling $100,000 purchased at a 5% discount would equal to a cash payout to a small company of $95,000. The factor keeps $5,000 until all invoices have been paid. When the last AR has been received by the accounts receivables financing firm, the owner is entitled to the final cash payment of $5,000, less any applicable fees. A reputable factor will endeavor not to assess hidden charges or wrongly take advantage of independent entrepreneurs. However, factors can make additional money during the collection proceedings, especially if payments exceed 30 days.
Small entrepreneurs seeking accounts receivables financing should browse the Internet's popular financial web sites for reputable companies. The Securities and Exchange Commission and the Better Business Bureau should list some reliable agencies with good track records and few complaints. Most online applications can be approved within 24 hours and companies guarantee cash via wire transfer or electronically deposited into company bank accounts. Factoring agencies take responsibility for collection proceedings on outstanding accounts and act as a third party agent on behalf of the entrepreneur. Other than the immediate monetary benefits, small businesses can alleviate the stress and strained customer relations that come with collecting past due accounts. As far as the customer is concerned, the company that is owed money is only utilizing the services of an agency to secure payment. They need never know of the owner's contract with an accounts receivables financing firm to purchase unpaid invoices in an attempt to keep their head above water.
Accounts Receivable FundingAccounts receivable funding is a service that helps a company to have access to money as soon as an invoice is generated similar to a cash advance. The company who offers the cash advance services may do the actual billing to the customer so that the customer pays them instead of the client. Once the customer pays the invoice the company providing the funds retains the cash advance amount plus any other fees that might apply. Any balance left over after the customer pays is refunded to the client. Companies just starting out may have a hard time waiting for payment from customers because of expenses. Accounts receivable funding gives a business owner available cash to use for payroll, supplies, rent, utilities, and other types of expenses necessary to keep the company operating.
Companies that provide accounts receivable funding can be found on the Internet offering services to businesses that can prove they are a legitimate company with legitimate sales. An application normally has to be filled out and be approved by the funding company. A credit limit for a cash advance is normally based upon or related to sales. Funds are released when an invoice is generated. The invoice is normally treated like a guarantee of the money being paid back plus any finance charges or other types of fees that the funding company may charge. The fees and interest rate should be considered carefully against the costs of other types of loans to see which one is the better choice.
The method of using cash advancements or regular funding helps to provide an entrepreneur with a valid way to guarantee cash flow without having to borrow using assets as collateral. Small businesses often have cash flow problems especially for the first couple of years in operation. Accounts receivable funding provides a small business with some security that can lead to a profitable business that eventually will not have to worry about operating where payments from customers are depended upon so heavily. "For which of you, intending to build a tower, sits not down first, and counts the cost, whether he has sufficient (means) to finish it" (Luke 14:28)? An entrepreneur should pray and seek God about important decisions pertaining to operating a business by asking for guidance.
Services that include a line of credit can be set up to have security collateral in case of default. This has to be something of value in case the client does not follow through and make payments on time. Accounts receivable funding is set up where the money from customers is the lien or collateral. A typical agreement between parties may state that the lien is against all accounts receivable. This means that any money owed to the client company from their customers belongs to the service company providing the funding in case of default or non payment. In some cases the service company takes on the billing and receiving of the funds and then reimburses the client for what is left over after finance charges and fees.
There are some companies that use factoring or accounts receivable funding on a regular basis and in long term situations to provide long term security until it is no longer necessary or needed. So this type of arrangement is not just for small businesses that need more cash flow. This type of arrangement can benefit all sizes and types of businesses and for various reasons. A client can use the extra cash flow to make necessary purchases or repairs that will help to increase profits. They can use the money to make investments that are smart and worth the risks. Having an agreement for funding helps a company to be determined to get the sales so that the cash flow continues and the loans to the service company are not defaulted on. When sales decrease the cash flow will decrease and there may be other consequences between the funding company and the client on what happens when customers fail to pay their bills.
One concern that should be gone over at the time an arrangement for accounts receivable funding is initiated is how the billing will be handled. If a customer does not make timely payments whose responsibility would it be to make collections calls? This is a major issue and should be settled up front. A business owner does not want the service company providing the funding to alienate a customer especially if the customer just pays a little late. Most companies have policy set up to pay bills in a certain way. This may mean taking longer than 30 days to pay. If the bill offers a discount for paying early the client has a much better chance of receiving payment sooner than later.
Choosing factoring over taking out a loan is favored with companies that prefer a method that provides better cash flow increasing as sales increase. This gives a company a much better method of security overall because the potential for profit is higher. Making a sale would mean immediate cash flow even though the customer has not made the payment yet. Revenue increases much more quickly so the bottom line does as well. Some sources say that accounts receivable funding may be set up to show an increase in sales revenue much sooner than waiting for the customer to make payments thus increasing sales revenue. Companies that choose this method over a loan at the bank might want to do some research online and find out exactly what the costs are versus the benefits before making a definite decision.