Factoring
Activate Funds from Accounts Receivable
Allowing extra time to satisfy invoices can be an incentive for clients but may leave a business in a financial bind. Large unpaid accounts could hamper the acquisition of materials needed to fill another order or hinder other operations. Fortunately, outstanding accounts payable and invoices can be leveraged to create cash during the waiting period.
Overview
Using outstanding accounts to generate cash flow is called factoring. The lender, called a “factor,” evaluates the client who owes payment. They decide how much of the outstanding amount they want to cover and give a lump sum to the borrower. The factor then collects the loan funds back from the client directly.
Accounts payable, invoices, and purchase orders can all be used to generate funds.
Since lenders look closely at the clients who owe money to determine the likelihood of repayment, borrowers with a low credit score may still qualify.
Once the client is ready to pay, they submit funds to the factor, who collects a factoring fee and forwards any remaining funds back to the business. The downside to this process is that the factor can change a business’s relationship with its clients. If they’re unhappy with the factor’s collection procedure, it may reflect negatively on the borrowing business.
Loan Highlights
Factoring allows a business to borrow on its outstanding invoices and purchase orders.
The factor takes over the collection from the business’s clients.
Up to 80% of the account value can be funded, in some cases.
The application process can be simpler and shorter than a traditional loan.
Pros
Equipment can be financed even if there’s already another loan in place.
Since the loan is secured on the equipment, credit history plays less of a part in the approval.
Borrowers don’t risk losing other assets if they default on the loan.
Cons
Equipment loans should only be used to cover equipment that lasts five years or more.
Leasing and sales leaseback options remove the equipment from the business’s assets.
Interest rates on some loans can be high.
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