Small enterprises need regular cash flow before their customers pay on outstanding invoices. In such scenarios, ongoing operations and progression plan of a company gets stuck due to a lack of funds. To resolve this issue, these businesses can sell their accounts receivables or invoices to a finance company. Through factoring accounts receivables, cash-strapped businesses receive immediate working capital in a simple process. Companies that use factoring receive cash as an advance amount of up to 90% on the basis of their invoice amounts and their aging schedule. For providing funds, the factoring company charges a discount fee between 2.5% and 7.0%
We can take an example where a company factors invoices worth $500,000 at a rate of 3.0% discount fee. The company may receive an advance amount within the range of 40% to 90% of $500,000 or let’s assume $450,000. This amount will be quite useful to meet all of the short term cash obligations such as paying out for labor, materials, rent for machinery, etc. When the full invoice is paid by the customer, to the finance company, they keep their $15,000 fee and they rebate the balance of funds ($35,000) to the company.
In a summary, a company has a major working capital issue since it is waiting for payments, which would generate revenues. Meanwhile, meeting operating expenses, or financing the next order from a client can become a huge challenge due to the shortages of cash. Here, a factoring company steps in to fill the cash void through buying invoices and giving out a significant amount of the invoice face value as an advance.
A/R factoring or invoice discounting offers various benefits over conventional financing.The major benefits are below:
We can take an example where a company factors invoices worth $500,000 at a rate of 3.0% discount fee. The company may receive an advance amount within the range of 40% to 90% of $500,000 or let’s assume $450,000. This amount will be quite useful to meet all of the short term cash obligations such as paying out for labor, materials, rent for machinery, etc. When the full invoice is paid by the customer, to the finance company, they keep their $15,000 fee and they rebate the balance of funds ($35,000) to the company.
In a summary, a company has a major working capital issue since it is waiting for payments, which would generate revenues. Meanwhile, meeting operating expenses, or financing the next order from a client can become a huge challenge due to the shortages of cash. Here, a factoring company steps in to fill the cash void through buying invoices and giving out a significant amount of the invoice face value as an advance.
A/R factoring or invoice discounting offers various benefits over conventional financing.The major benefits are below:
- Cash flow Improves– Instead of waiting for 15-60 days for payment, the company can receive cash in 4 days while applying for the first time, within 24 hours in the subsequent instances.
- Enhances Credit Score – Factoring does not increase a company’s liability. Hence, its cash to debt ratio improves, and so does its credit history.
- Hassle free Processing – The process of factoring is quick and efficient. The application forms are simple to fill out and turnaround time of the factoring companies are way faster than the slow processing from banks.