Accounts receivable factoring is considered a great option for the companies that need immediate money and are not able to get a conventional bank loan. If you have a small business and you are always concerned about arranging the working capital which often falls short, if you avail factoring services, you can transform your unpaid bills into cash in hand.
Also known as invoice factoring and invoice financing, this is probably the best option for many business owners when the customers do not pay them right away, but they need cash to run their business without interruption.
Receivables factoring should not be confused with a loan. Factoring is a better option than a loan because the latter takes time to get disbursed and asks for security or collateral. The factoring works on the concept of selling your invoices at a discounted rate to the factoring company and getting cash in return for the unpaid bills. The factoring company becomes the owner of the invoices and receives payment from the clients directly within 30 to 90 days.
The invoice factoring company pays around 85% to 90% cash immediately while the remaining payment is made after collecting the invoice from the clients. The invoice company deducts its fees from this amount too. The fee can range somewhere between 1.5% to 3.5% and more.
The pros and cons of the accounts receivable financing company can be summed up here.
The pros include:
- Provides immediate cash or working capital
- Creates an improved cash flow which also helps to grow your business.
- Easy to get as compared to other sources such as banks and other financing institutions.
- Evaluates the creditworthiness of your clients.
- No security required. Accounts receivable factoring does not need any collateral or asset like property papers, inventory, etc.
The cons are:
- Other than their own high fees, they may also charge hidden fees such as application fees, processing fees, credit authentication fees, late fees, etc.
- Since they collect the payment from the customers directly, the main company loses control over the customers.
- You might not get financing in the case of low creditworthiness of your customer or if your business is low on revenue.
- In a recourse factor, the factoring company may return you the unpaid invoice and ask for full payment from you, just in case your client denies the payment to the factor company.