8 Little-Known Facts About Receivable Factoring

January 17, 2017 | By | Reply More

8 Little-Known Facts About Receivable Factoring
Most entrepreneurs know too well a handful of financing tactics: enticing investors, entreating bankers, and asking family and friends for loans. These common ways of obtaining cash tend to be demeaning and demoralizing, but business leaders are willing to do it for the money.

Meanwhile, receivable factoring is a financing solution that few in business fully understand; plenty of literature on the method presents it as controversial and risky, but in truth, many businesses have much to gain from participating in factoring programs. If you are searching for a financing opportunity that doesn’t have you imploring one person or another for a small cash infusion, you must read the following facts about receivable factoring.

1. Receivable Factoring Goes by Many Names

Receivable factoring might sound familiar even if you’ve never heard that term before. Invoice factoring, receivable financing, invoice or receivable discounting ― all these are names for essentially the same practice: using accounts receivable to secure fast cash for a business.

Receivable factoring might sound familiar even if you’ve never heard that term before. Invoice factoring, receivable financing, invoice or receivable discounting ― all these are names for essentially the same practice: using accounts receivable to secure fast cash for a business.

2. Receivable Factoring Has Been Around for Centuries

The first known instance of receivable factoring occurred more than 4,000 years ago, in Ancient Mesopotamia. The Romans enjoyed a similar practice, where enterprising businessmen would sell promissory notes at discounted prices. Throughout the Middle Ages, markets throughout Europe used some form of factoring to help merchants stay in business during troubled times, and factoring came to America with the first colonists to settle on Plymouth Rock. The practice of factoring has been around so long that factoring companies have the service down to a science.

The first known instance of receivable factoring occurred more than 4,000 years ago, in Ancient Mesopotamia. The Romans enjoyed a similar practice, where enterprising businessmen would sell promissory notes at discounted prices. Throughout the Middle Ages, markets throughout Europe used some form of factoring to help merchants stay in business during troubled times, and factoring came to America with the first colonists to settle on Plymouth Rock. The practice of factoring has been around so long that factoring companies have the service down to a science.

3. Receivable Factoring Works Better for Some Businesses

All sizes of businesses can benefit from factoring, to a single entrepreneur working from a basement office to Fortune 500 companies looking for fast cash. However, not all types businesses can factor their receivables. Typically, factoring providers will only work with companies that sell to other companies ― i.e. B2Bs ― and that set specific credit terms on their payments, such as net-30 or net-60.

All sizes of businesses can benefit from factoring, to a single entrepreneur working from a basement office to Fortune 500 companies looking for fast cash. However, not all types businesses can factor their receivables. Typically, factoring providers will only work with companies that sell to other companies ― i.e. B2Bs ― and that set specific credit terms on their payments, such as net-30 or net-60.

4. Receivable Factoring Isn’t Just for Troubled Businesses

Most information online that touts the benefits of factoring usually targets businesses that aren’t doing well. However, your business doesn’t have to be sinking for factoring to be a good idea. Most crucially, factoring creates cash flow within a business, and that additional cash can be used in ways that help already-thriving businesses. For example, you might use extra cash to expand your business with additional equipment and employees. Alternatively, you might choose to factor for the stability and dependability it lends your finances.

8 Little-Known Facts About Receivable Factoring
Most information online that touts the benefits of factoring usually targets businesses that aren’t doing well. However, your business doesn’t have to be sinking for factoring to be a good idea. Most crucially, factoring creates cash flow within a business, and that additional cash can be used in ways that help already-thriving businesses. For example, you might use extra cash to expand your business with additional equipment and employees. Alternatively, you might choose to factor for the stability and dependability it lends your finances.

5. Receivable Factoring Is Not the Same as A/R Loans

Though the names sound familiar, receivable factoring is not the same as accounts receivable loans. The latter uses your invoices as collateral for a loan, which means you will slowly and surely pay the money you receive back to your lender. Often, A/R loans have unreasonably high-interest rates, which typically negate any cash flow benefit you received from the loan. Conversely, factoring is not a form of debt at all. Factoring companies buy your unpaid invoices, discounting a small service fee, and that’s it.

Though the names sound familiar, receivable factoring is not the same as accounts receivable loans. The latter uses your invoices as collateral for a loan, which means you will slowly and surely pay the money you receive back to your lender. Often, A/R loans have unreasonably high interest rates, which typically negate any cash flow benefit you received from the loan. Conversely, factoring is not a form of debt at all. Factoring companies buy your unpaid invoices, discounting a small service fee, and that’s it.

6. Receivable Factoring Doesn’t Rely on Your Credit

Another way factoring is different from loans is that factoring companies are less than concerned about your financial history. Because they are collecting money not from you but from your clients, factoring companies care only about your clients’ credit scores. Sometimes, companies will charge you fees if your clients aren’t particularly creditable, but often you aren’t affected by your clients’ likelihood of paying.

Another way factoring is different from loans is that factoring companies are less than concerned about your financial history. Because they are collecting money not from you but from your clients, factoring companies care only about your clients’ credit scores. Sometimes, companies will charge you fees if your clients aren’t particularly creditable, but often you aren’t affected by your clients’ likelihood of paying.

7. Receivable Factoring Provides Unlimited Potential for Capital

Other forms of financing are limited, and they will remain limited regardless of a business’s performance. Meanwhile, factoring provides capital at an increasing rate alongside your business. As long as your company increases its receivables, the money gained through factoring will increase. Therefore, the only limit on your income potential is your own productivity.

Other forms of financing are limited, and they will remain limited regardless of a business’s performance. Meanwhile, factoring provides capital at an increasing rate alongside your business. As long as your company increases its receivables, the money gained through factoring will increase. Therefore, the only limit on your income potential is your own productivity.

8. Receivable Factoring Offers the Fastest Payment

Your company usually must wait an entire term limit to receive payments from clients, which means a delay of at least 30 days for the cash you need to grow your business. Other types of financing might make you wait even longer: A grant takes months to receive, and a loan takes weeks. However, most factoring companies can provide you with your hard-earned cash in as little as a day. If you start the factoring process now, you could have cash-in-hand tomorrow.

 

Royce Calvin

Royce is a writer for PowerHomeBiz.com. He is as passionate about Internet Marketing as he is with his ever-present cup of Starbucks coffee.

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