Factoring Accounts Receivable: Unlock Working Capital Potential
Is your business waiting N30-N90 days on customer payments?
Is waiting on these payments putting constraints on your operations?
Has your company only been in business for a short amount of time?
Is your business struggling to grow because of not enough capital?
If you have answered yes, to any of the above questions, then factoring your commercial accounts receivable could be beneficial for your business. It is a quick and cost-effective solution to generate working capital.
Multiple Names Same Great Solution
Factoring also known as Invoice Factoring, Accounts Receivable Financing, Invoice Purchase or even Accounts Receivable Factoring, is an effective way for businesses to quickly access working capital. Factoring has been around for thousands of years. Modern day factoring came into shape during the industrial revolution in the 1800’s. Throughout the years, factoring has always been a reliable solution to help businesses turn their unpaid invoices into capital.
How Does Accounts Receivable Factoring Work
To factor accounts receivable, a business sells their unpaid commercial invoices to a funder at a discounted rate. Once the funder collects on the invoice from the customer, the client receives the remainder of the invoice minus any fees.
By factoring your commercial invoices your business gains access to capital within 24 hours versus waiting on customer payments to support business operations and growth opportunities.
Why Factoring Accounts Receivable is Beneficial
1. Gain working capital without accumulating additional debt
Building debt can be a beneficial tool for businesses to maintain and grow. By adding too much debt, it can have the reverse effect and over leverage a business. Factoring allows a company access to working capital without having to take on new debt.
2. Quick Access to Working Capital
When a business has an immediate need for cash flow, moving quickly is imperative. While other funders can often take two months or longer to make a decision to extend capital, Seacoast Business Funding is able to close and fund our clients within 2 weeks.
3. Mitigate operational challenges
Many businesses rely on customer payments as their source for working capital, but if your invoice terms range from N30-N90 days and a good amount of your customers are paying on the tail end, and makes it difficult to keep operations running smoothly. Enter factoring. The solution provides cash flow for your business to cover payroll, advertising, fulfill orders and purchase inventory, instead of having to rely on outstanding invoices for working capital.
4. Cash flow through business ebbs
Many businesses at one time or another have faced good and bad cycles. Some of these downturns can be due to industry, larger economic issues or seasonality. During these times, many businesses can feel an additional strain if their funding partners cut off credit making it more difficult to sustain business during those times.
While a business may be facing or in the midst of a downturn securing capital when financials are inconsistent is a large concern. A factor weighs the strength of the clients’ accounts receivable more so then solely on the clients’ financial strength. Which is a great alternative for businesses to utilize a factor to provide a reliable source of cash flow during tenuous times.
5. Difficult to expand and grow their business
Above we covered how businesses can struggle with working capital during ebbs, but they can also feel those strains during times of growth. During growth cycles, businesses need capital to acquire more inventory, materials, employees and equipment. High-growth businesses may not be able to increase their lines of credit with their current funding institution whether due to timing, lending requirements or credit-worthiness.
There are few options to raise capital to support growth. The first is bringing on an investor, which means giving up a piece of equity in the company, which is never ideal. The second would be to turn down the new business opportunities, which decreases revenue and effects overall profitability. A viable solution is to factor accounts receivable to provide your business with a flexible infusion of working capital to support your businesses growth trajectory.
6. Collection Time Shorter
When a business factors their accounts receivable, they are not only getting the funding they need, but a partner who wants to help their business thrive. A factor aids in ensuring their clients customers are paying in a timely manner and works with the company to manage the collection process. Providing your business with quicker access to cash flow on paid invoices.
Invoice Factoring is a reliable and effective working capital solution for businesses at any stage. We have detailed the history, the mechanics, and the benefits of why your business should factor accounts receivable. Seacoast Business Funding is a trusted partner who helps businesses access working capital quickly and easily.