Accounts Receivables Financing is one of the oldest forms of commercial financing. In addition, although the industry lacks the kind of visibility that the loan and leasing industries do, the industry does currently handle more than 50 billion dollars worth of receivable financing per year, providing a quick and convenient funding alternative to growing companies who need capital to expand their business. Many businesses large and small utilize this financial tool to provide cash flow and helps avoid the problems that slow-paying customers create for fast-growing companies.
Accounts Receivables Financing protects your business against customer credit losses while converting your accounts receivable to cash. Accounts Receivables Financing is a multi-faceted service that combines credit protection, A/R bookkeeping, collection services and financing.
When companies factor with AFC, we purchase their accounts receivable and assume responsibility for their customers' financial ability to pay. In effect, we extend credit to their customers, collect from them, and perform the necessary bookkeeping functions for their transactions.
Here is how it works. Factors purchase your eligible accounts receivables and fund you with immediate cash. Accounts Receivables Financing is not a loan. There is no debt repayment, no compromise to your balance sheet, no long-term agreements or delays associated with other methods of raising capital. Financing allows you to use your own hard-earned assets to create cash for the growth needs of your company today.
The job of AFC is to make sure that you receive the maximum amount of funding possible for your receivables, allowing you to meet your working capital needs.
Benefits.
Accounts Receivables Financing is not a loan. Banks generally will not make funds available to companies without high levels of assets as collateral. Because factoring companies consider accounts receivables as assets (banks do not), the service is easily applied to every business, whether the company is a startup or is well established. As a result, there is no "debt repayment", no balance sheet compromises, no long-term agreements or the kind of delays that are associated with other methods of raising capital. Factoring allows you to use the cash your company is owed in receivables immediately, for a small fee. In a word, the best advantage that Accounts Receivables Financing has over loans is flexibility.
Other benefits of factoring are:
1. reduction of bad debt.
2. professional collections.
3. easy Invoice processing.
4. ability to offer credit terms to customers.
5. meet increasing sales demands.
6. take advantage of early payment and volume discounts.
7. eliminates early-payment discounts.
8. eliminates giving up equity or incurring additional debt.
9. ability to leverage your customers' credit.
10. no geographical limits.
11. detailed management reports.
12. improved cash flow.
13. reduced operating expenses, and
14. greater working capital financing.
Weighing the costs.
Most businesses weigh the costs of factoring between factoring and putting up with cash flow problems. If you are missing sales opportunities because of a lack of cash flow, be sure to consider that lost revenue when weighing the costs of factoring. Consider what increases in profits you can achieve with additional cash flow.
Example: in your current situation, without factoring, you have gross revenues of $100,000 a month. Your cost of goods is 65% resulting in gross profits of $35,000. Subtract overhead at 32% ($32,000) and you are left with a net profit of $3,000.
Now, consider what additional cash flow would enable you to do, such as take additional discounts for volume purchases, increase your sales, and advertising effort, or add a second shift. By factoring the first $100,000 in receivables, we can project a doubling of revenue to $200,000 with a consistent 65% cost of goods (although this may actually come down depending on if you can receive discounts for paying in cash). This puts your gross profit at $70,000.
Subtract overhead of $44,000 (which is more, but never double) and the cost of factoring----$6,000----and you are looking at a net profit of $20,000. In this instance, which is more typical than not, the decision not to factor would have cost you $20,000 in missed opportunity for one month. It is rare that companies decide not to factor because they could not afford to. In fact, in most cases, companies decide to factor because they cannot afford not to.
