Many small businesses are unaware of a particular type of financing that is available to them. In many cases, they can take advantage of their account receivable balances to finance their companies' operations or new equipment purchases or even simply to improve their cash flow. It's called factoring account receivables and it involves selling the A/R to another business, usually at a discount or for a specific fee.
It's a fairly simple process that makes a lot of sense in many situations. The business that owns the A/R, also known as the seller, finds an investor that is interested in buying account receivable balances from others. This investor is called a factor, and buying account receivable balances is usually their primary business. Debtors are the third group in this financial process, and they are the customers that owe the seller for purchases they made and for which they owe payment to the seller. They are the account receivable for the seller company.
Account receivable funds are assets of a business and as such they can be bought and sold like equipment or inventory or any other physical asset. The only participants who have no say in such sales are the debtors. Nor should it matter who they ultimately pay-as long as the seller and the factor agree on the deal.
Factoring account receivables is a simple process. The factor offers the seller a sum of money to purchase its account receivable. The two parties negotiate this monetary advance, which is usually some percentage of the value of the A/R. Once an agreement is reached, the factor pays the monetary advance to the seller, providing the business with an infusion of cash that can be used for whatever purpose the seller chooses. When the debtors pay what they owe to the seller, the factor receives a further fee that was also previously negotiated.
Occasionally, a debtor will default on paying his obligation to the small business. That is one of the primary risks of anyone who engages in business and it's no different when factoring account receivables. The risk is usually shared by the factor and the business from which it purchased its A/R. If the debtor defaults, the seller keeps the monetary advance that it already received. But since the debtor won't pay its obligation, neither the seller nor the factor will receive any further money. The factor loses its initial investment of the monetary advance while the seller loses the bulk of the A/R that was owed by the debtor. It's sort of a lose/lose situation... except for the debtor who gets off scot-free unless the seller decides to take it to court over the unpaid debt.
But the risk is not so dire as to preclude consideration by any small business that finds itself in need of financing. Factors wouldn't be in the business if they didn't enjoy more success than failure. And many businesses have benefited from selling their account receivable balances to such investors, especially businesses that have not been able to engage in more traditional types of business or corporate credit.
Factoring account receivables could be just the right step for a business to take when they need financing for projects, to purchase supplies, or even to fund its daily operations for a short period of time. It is an option that is certainly worth looking into by any small business with financing on its mind.
Corporate Credit Concepts specializes in Factoring Account Receivables. For more information about Factoring Account Receivables and how it might benefit your business, please CLICK HERE for a free phone consultation.