Today, many businesses find themselves strapped for cash and it can be hard to borrow what you need, just for expenses like payroll and maintenance. Yet, these bills must be met and it might be too difficult to qualify for the funding, with traditional financing. So, what can you do? There is a strategy known as account receivable factoring and it may be just what you need.
What is Factoring?
The best way to explain this strategy is with a fictional story. Let’s use company X with Jim as the owner. Jim’s business sells rebuilt parts to many local businesses and he makes a good profit from his sales. However, Jim has a problem. He invoices his customers once a month and it may take another 30 or 60 days to receive his payment. Here is an example:
Last month (June) Jim sold $10,000 in parts to a local distributor. They were invoiced on July 1st but company X did not receive payment until September 10th. Now multiply this by four or five and it’s possible that Jim’s company could have $50,000 in payments due at any given time. This could put a dent in one’s ability to meet operating expenses.
How Account Receivable Factoring Works
Jim goes to a account receivable factoring service and turns all his invoicing over to them. In exchange, he receives as much as 80 percent or more of his payments right away. In this case, 80 percent of $50, 000 is $40,000. Plus, once the service receives payment from Jim’s customers, he may receive the additional 20 percent minus fees, but this amount can vary according to agreements.
Jim now has $40,000 for payroll and other expenses and can purchase more used parts for rebuilding. In fact, additional profits more than make up for the fees he pays. This is why account receivable factoring can easily become a “win/win” situation.
