Accounts Receivable Factoring: Definitions, Pros and Cons, and Alternatives
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Company or business: the B2B company/business that wants to get funding to meet financial needs Customer: an invoiced customer of the company/business Factoring company or factor: a lender that provides financing through the invoice factoring process
What Is Accounts Receivable Factoring?
How Does Factoring Accounts Receivable Work?
How Are Factor Fees Calculated?
Pros and Cons of Accounts Receivable Factoring
No collateral is required, other than the invoices. You can typically access the cash quickly. Factoring can help your business manage cash flow. Lenders typically focus less on the business’s or owner’s credit score and more on the creditworthiness of the customers owing on the invoices. Some factors will work with startups. Funds provided by a factor can typically be spent in any way the business desires, with no restrictions. The factor company takes over collecting on the invoices, freeing up your business to handle other tasks. Rates can be relatively high. Plus, there can be a variety of fees, including application, processing, and service fees, which means that factoring can be a more expensive way of getting business funding. This can be especially true if the invoiced customers don’t pay on time. The factoring company has control of the invoices after your business sells them. That’s why it’s important to choose a factor that will treat your customers fairly and with respect. If customers don’t pay the invoices that were factored, your business may need to pay for those invoices, along with added fees. If a business’s customers aren’t creditworthy, then it may be difficult to factor accounts receivable from them.
Recourse Versus Non-Recourse
Choosing the Right Factoring Company
Is it registered in your state? Does it have good reviews online? What is its Better Business Bureau ranking? Does it specialize in specific industries? (Some factoring companies work with very specific industries, such as medical or freight transport, while others are more general.) What are its rates and advance percentages? Is there a minimum number of factoring transactions required each month? If there are no minimum requirements, will factoring a certain amount of invoices each month provide your company with a discount?
Alternatives to Accounts Receivable Factoring
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