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What is Receivable Factoring and How Does It Help Companies?

Regardless of their business industry, it’s common for many organizations to face cash flow problems every so often. This is especially true for operations that run in certain sectors, including but not limited to trucking, consulting, and construction.

When the organizations that operate in such sectors send invoices to their clients, they put specific due dates upon them. This gives the end client significant time to pay off the billed amount. With that, the period to pay off these dues often ranges from 30-90 days. As a result, this keeps the respective company waiting to get paid for the work that it has already delivered to its clients.

As a result, these companies have to put these invoices into accounts receivables (ARs). While these businesses wait for clients to fulfill their respective invoices, cash flow problems can arise during this collection period and threaten their very operations.

That’s where receivable factoring comes in.

By giving companies a way to sell their accounts receivables for cash, this method can help businesses resolve their cash flow problems with ease. As a result, companies can cut down the collection period against their invoices and generate tangible revenue without a long wait time.

But exactly what does this factoring mean, and how does it help companies? To help you understand these functionalities, here’s a lowdown on this method and its many benefits.

Receivable Factoring Turns Pending Invoices Into Immediate Revenue

In its simplest form, accounts receivable or invoice factoring allows a specialized company to purchase the unpaid invoices of a business. By doing so, the factoring company delivers an immediate cash payment to the business in question. 

Typically, this payment covers 80-90 percent of the total AR amount right away. In some cases, the initially covered amount can go as high as 95 percent of the invoice value. This means that even if the invoice’s actual due date is weeks away, the business doesn’t have to wait that long to recover a majority of its funds. 

When the end client who is designated to settle the invoice pays their dues in full, the factoring company directly receives that amount. The business then also recovers the rest of its funds and completes the transaction. 

The factoring company charges a specific fee for its services that is often free of any hidden charges. Since this fee takes away from the invoice’s overall value, factoring is sometimes perceived as selling one’s ARs at a discount. With that being said, benefits such as faster fulfillment and transparent costs add to this method’s popularity.

Factoring Companies Are the Backbone of Several Industries

Due to their overall process, AR factoring firms are quite sought after in a host of industries. From transportation to research, every business that wants to maintain a proper cash flow in the face of challenging invoices turns towards this financing option.

There are several reasons for that. The most common of them include the following. 

Funding Operational Costs

When businesses cut down their collection period with receivable factoring, the maintenance of a proper cash flow does more than putting some funds in their account. It also helps them in financing their operational costs that would otherwise remain unfulfilled.

This includes support for essential expenses such as rent, utility, and infrastructure costs. As a result, businesses don’t have to worry about their essential bills going past their due date while they wait on specific ARs to reach their respective deadline.

Maintaining Safety Net for Emergencies

No matter the type of industry that a business operates in, it always has the threat of emergencies and related expenses looming over it. From natural disasters to operational hazards, these situations can arise from a variety of reasons. 

That is why those businesses that don’t want to walk into a financial dead end in such situations turn to invoice factoring. This provides them with a safety net to fall back on in case of emergencies, even if their AR due dates are weeks or months away in the future.

Covering for Expansion Plans

While the need to expand their operations mainly holds true for startups, it also applies to established businesses that want to scale with time. But seeing that noticeable growth requires significant funding, a delay in getting paid for their work can get in the way of these companies. 

That’s where receivable factoring can help turn things around for the better. By looking into this mechanism, businesses can receive the required financing that is essential for executing their plans of growth.

Factoring Can Provide Faster Fulfillment in More Than One Way

While factoring invoices most certainly reduces the collection period, its faster fulfillment goes beyond this specific advantage. It also holds in the overall time it takes as compared to other financing options.

If a business applies for a loan, it can take anywhere from a few days to a few weeks to process the application. Even when the company in question does not get the loan in the end, it has to wait to get an answer from the bank or lender. This mechanism can be frustrating in any situation. But it is especially irritating when a company has urgent needs to fulfill.

While payday loans can be presented as a possible answer to this issue, their excessively high-interest rates say otherwise. Due to this reason, many companies want to access viable options that provide them with a timely resolution, but without costing them a fortune in interest rates.

That’s where receivable, or invoice factoring comes through as the most suitable choice for many businesses. With its fast fulfillment and straightforward pricing, it becomes easier for many businesses to turn to this method without worrying about their costs.

By looking into the right receivable factoring company, businesses can ensure that their applications get processed with a swift process and affordable costs. Since several factoring providers are available in various industries that take a day or two to entertain urgent requests, this feat is not that hard to achieve.

The Method Can Also Set You Free of Liability

In many industries and settings, it is common for factoring companies to offer their services through multiple segments. 

This includes the following two options.

  • Recourse Factoring
  • Non-recourse Factoring

In order to see which of these methods is right for you, it’s essential that you look into each of them in a detailed manner.

Recourse Factoring

This is the more common factoring method, and allows businesses to access this financing at comparatively lower costs. However, it comes with a stipulation related to accounts receivables that remain unpaid. 

If a client does not pay their invoice even after it has been factored by the business, the business is responsible to return the full amount to the factoring company. This remains a simpler way to agree on a factoring transaction. As mentioned above, it is also more affordable. However, it does add to the business’ liability. 

Non-recourse Factoring

This factoring method comes from select companies. It comes at a higher service fee than recourse factoring. However, it provides businesses with an additional layer of safety that isn’t available with the other factoring method. 

It’s because in non-recourse factoring, the respective business is typically not responsible for invoices that remain unpaid well after their due date. Even if the customer fails to uphold their end of the bargain, the factoring company bears the loss. This makes non-recourse factoring a more reliable method of receivable factoring, despite it being offered at a higher price.

Which Method is Right For You?

Businesses that deal with a higher risk should move forward with non-recourse factoring by default. While the method comes at a higher service fee, its advantage of addressing a business’ liability is exceptionally helpful. 

However, if an operation believes that its clients will fulfill their commitment of paying their invoice, it can most certainly go with recourse factoring. With lower service fee and easier accessibility, it can fulfill the main purpose of reducing the collection period without adding to your costs.

With that being said, the final answer depends upon your needs and discretion. That’s why you should make sure to take a good look at your requirements before settling in on either of these methods. 

How Can You Factor Your Accounts Receivable?

After understanding the method’s basic functionalities, it becomes easier for you to see how factoring can help your company. To benefit from this medium, all that you need to do is to contact a reliable factoring company in your area.

By discussing your needs and providing documents such as client and account information, you can see how much it will cost you to receive your required financing and how soon you can obtain it.

From there, you can easily use invoice factoring to fulfill your urgent requirements or cater to your future plans for growth. This makes sure that your business has all the support it needs to maintain and scale its operations even in the face of lengthy collection periods.

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