Accounts Receivable Factoring – an Instant Low-Risk Business Finance Facility

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Accounts Receivable Factoring – an Instant Low-Risk Business Finance Facility

Updated: 17th May 2021

If you’re looking for a borrowing facility that provides cash amounts based on how much work you invoice during the month, then accounts receivable factoring may be the solution.

Also known as invoice factoring, this type of finance is based on the value of your sales ledger, with an agreed percentage of each approved invoice being released - generally within 24 hours of it being sent to your customer.

These regular cash injections provide a constant supply of working capital, and allow you to plan for future growth with more confidence.  

You’ll find that many established financial organisations have a receivables financing department, with smaller specialised lenders providing a breadth of choice for businesses struggling to obtain ‘standard’ business bank loans.

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So what is accounts receivable financing in detail?

Receivable financing involves ‘selling’ the debts in your sales ledger at a discount to a factoring company. The lender takes charge of your credit control function, sends out reminders to late paying customers, and receives payments in.

These are the basics of how it works:

  • An agreement is made between you and your financier as to which invoices can be factored
  • As work is completed, you invoice your customers as normal and also send a copy of the invoice to your factor
  • The agreed proportion, which is usually between 80% and 90%,  is released to you – sometimes within 24 hours
  • When your customer pays the invoice in full, the factor deducts their fees and remits the final balance to you

The aspect that distinguishes receivables factoring from other types of invoice finance is the loss of control of your sales ledger. This can be a relief for some people, freeing up a sizeable portion of the day to focus on income-generating activities.

For other businesses, keeping control of sensitive communication with their customers is paramount, and relinquishing control could adversely affect their business identity.

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Eligibility criteria for business receivable factoring

There are certain conditions that your business will need to meet to be eligible for invoice factoring. These vary between companies, but generally lenders will look at the industry in which you operate. If it is known to have problems with late payment of invoices, you may not be eligible.

Other requirements include:

  • Few disputed invoices
  • A good track record of obtaining payment
  • Work on each invoice completed and accepted by your customer
  • Low levels of bad debt
  • A good credit record for your customer base
  • Direct payment of each invoice to the factoring company

In essence, you’ll need to provide the lender with a clear picture of effective sales ledger processing, plus a history of minimal bad or doubtful debts.

How financing receivables will benefit your business

Leveraging the inherent value of sales invoices is a low risk finance option for both parties. Receivables financing requires little in the way of paperwork - with no laborious forms to complete and minimal credit checks, it’s a quick and easy way to secure reliable finance as long as your business meets the necessary criteria.

You’ll have more time to focus on sales and customer service as the factor takes care of any credit control issues. The benefit of this cannot be understated if you’ve been spending lots of time chasing debt, and not enough on increasing revenue.

As long as you continue to generate trade, the constant struggle to pay bills is gone and ongoing liabilities are met without question. This fact alone can breathe new life into a small business with previously limited growth potential, and allow a sustainable plan for development to be implemented.

Available levels of finance increase as the business grows – the more you sell, the more money can be advanced.

There’s no requirement to offer personal guarantees or collateral to support your borrowing, unlike traditional business bank loans.

Negotiating the best factoring agreement

When thinking about the terms of a cash flow finance agreement, you may be offered an arrangement ‘with recourse.’ This means that you will be liable to repay any monies already advanced if your customer fails to pay the factor.

The fees and charges with this type of factoring arrangement would be lower to reflect the reduced risk to your lender. You can also take out a credit insurance policy to cover you in these instances.

You may prefer the alternative option, ‘without recourse,’ which would attract higher fees but no ongoing liability for your customers’ unpaid debts.

It can be difficult to know which type of accounts receivable funding is best for your business. Real Business Rescue can provide the professional and independent advice needed, guiding you to the most beneficial option.

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