Accounts Receivable Financing (Factoring)
A factoring transaction allows a business immediate capital based on future income. This figure is obtained from the amount due on a business invoice or account receivable. Factoring allows interested parties to purchase the funds due at a discount in exchange for cash up front. Factoring is not a loan, as neither party issues or assumes debt. The funds are provided to the company in exchange for the accounts receivable so it is also not subject to any restrictions regarding use.
Companies use accounts receivable financing to fund short term projects, hire extra staff, or simply to take stress off of the accounting department in chasing down money from outstanding invoices that are over 90 past due. By using factoring services, Mission Valley Capital will check your customers’ credit ratings and notify you of potential risks in detailed monthly reports.
Note that the factor is more concerned with the creditworthiness of the invoiced party than the company from which it has purchased the receivables. Making sure the obligations of the invoiced party are met is imperative to a successful factoring transaction. Although factoring is a relatively expensive form of financing, factors provide a valuable service to companies that operate in industries where it takes a long time to convert receivables to cash.
Accounts receivable financing (or Factoring) is funding offered to companies based on their customers who have outstanding bills. Outstanding invoices are bought (at a slight discount), and give you the immediate funds your company needs. Because the invoices are purchased, there is no interest rate or fixed payments. It is important in factoring to have partners who come through on shipments and orders.
Advantages of Accounts Receivable Financing:
- Cash in 24 hours
- Can be used for any type of business
- Credit insurance on your clients at no cost to you
- No fixed payments or interest
- Quicker than traditional business financing
Invoice financing also benefits lenders because invoices act as collateral. The lender also limits its risk by not advancing the entire invoice amount to the borrowing business. Invoice financing doesn’t eliminate all risk since the customer might never pay the invoice but it can mitigate risks in the right circumstances.
While factoring can be a solution to a business’ immediate capital needs. You never want to jeopardize your company for fast cash. Factoring should be used when the orders are outpacing your ability to fill them because the cash on hand is limited. Call today and speak to one of the partners at Mission Valley Capital to see to learn about the different Factoring options available.