Accounts receivable is a critical factor for any business because lousy management can lead a company to bankruptcy. Therefore, having effective control of the customers who owe you and an effective collection system will help your company meet its financial goals.
One reason why companies grant credit is to increase sales or retain customers, but what happens if customers don’t pay you on time? You could have problems with your income and put your company’s financial stability at risk.
Properly managing accounts receivable is essential to have a healthy cash flow that will help you meet your financial commitments such as paying salaries, suppliers, paying off debts, credits, investments, and to help you meet your goals, there is invoice factoring.
invoice factoring is a type of asset financing arrangement in which a company uses its outstanding invoices to receive financing. Factoring companies generally advance companies 70 to 90 percent of the value of their unpaid invoices. Then, the factoring company collects the invoices and pays the company the remaining amount minus a fee for its service.
This type of asset-based financing allows companies to gain instant access to working capital without dealing with the long waits involved in borrowing from a bank.
While bank loans can be secured by different types of collateral, including plant and equipment, real estate, and the business owner’s assets, accounts receivable financing is backed strictly by invoices and the promise of payment from customers.
Invoice financing helps businesses free up capital trapped in sales already made but with outstanding invoices to be paid. When a company leverages its accounts receivable to increase its cash flow, it also doesn’t have to worry about collection schedules. Instead of focusing on collecting invoices, it can focus on other core aspects of its business.
It should be noted that factoring is not designed for companies with sufficient cash or credit resources to take advantage of all available opportunities. It is also not cost-effective when used casually to accelerate accounts receivable where there would be no opportunity cost simply waiting for payment.
Why consider factoring?
Factoring is Not receivable; it does not create a liability on the balance sheet. Instead, it is the sale of an asset, in this case, the invoice.
Factors also provide services that banks do not: they typically take over a significant portion of the bookkeeping work for their clients, assist with credit checks, and generate financial reports to let you know where you stand.
Factoring is an accepted and effective cash management tool worldwide, helping companies manage their working capital, increase cash velocity and optimize their cash conversion cycle.
It is a business enabler, whether in the domestic or international market. Depending on a company’s business needs, factoring services is the solution to keep cash flowing correctly.
Factoring helps drive business growth by providing the funds needed to maintain the balance while waiting for customers to pay outstanding invoices. When there are problems in a company’s financial management, it is a viable solution.
Therefore, when it comes to reviewing accounts receivable, factoring is the way to advance collection without resorting to other outlets.