Accounts receivable factoring is a very useful service for small companies which want to focus on growth. There are several options that are available depending on what their needs are and how much they want to pay. The main advantages are a stable cash flow and much greater assurance of payment. It also removes much of the accounting burden from a business.

There are basically two types of accounts receivable factoring. A large portion of the value of and invoice can be paid up front with the remainder, minus fees, paid at the date of maturity. Alternatively a single amount can be paid on the date of maturity. A reserve amount can also be charged which will only be paid when the debtor actually makes payment. The bulk of the money will be guaranteed on time though.

The reason that companies make use of accounts receivable factoring is that it allows for cash to be invested in their own business rather than having it effectively lent to another business. It can also remove a large part of the burden of managing finances. If there are a lot of debtors and if they have different payment terms then it can become complicated to keep track of them all.

A small company can also face a significant risk if they are not paid by a major client. A large factor is far more able to handle this kind of risk. They will charge more for non recourse protection and for managing other functions such as following up and receiving payment but it could be well worth it if a small company has to employ someone specifically to do this.

The charges for insuring payment should not be too high though because a factor will always check the creditworthiness of debtor first and the often wont accept invoices issued to companies that have even an average credit rating. The factor will normally notify the debtor if they will be demanding payment from them when it is due.

Accounts receivable factoring has several advantages over other types of finance. Because it is basically the sale of an invoice there is not need to put up assets or meet any of the other criteria required from a bank loan. It also provides all the other services such as reporting and collection that you would not get from a bank.

Equity and investment capital can also be very expensive and take a long time to process. Selling invoices will yield almost instant cash and there is very little risk as it is backed by money that is owed to the company. Selling invoices can also be done on a continual basis and has many of the benefits of revolving credit.

Generally the cost of accounts receivable factoring is offset by the cost of interest that would be generated on a loan that would be taken over the same period of time. In order to determine how much cash needs to be generated in this way a business needs to determine how much the related services are worth to it and how much variability in cash flow it can manage. If fluidity is really important than it is generally the correct decision to make.

EBF provides businesses with alternative financial products across Canada. Whether you need factoring Calgary or business finance Ottawa, they have the solution for your funding needs.

EBF provides businesses with alternative financial products across Canada. Whether you need factoring Calgary or business finance Ottawa, they have the solution for your funding needs. http://www.ebf.ca/

Author Bio: EBF provides businesses with alternative financial products across Canada. Whether you need factoring Calgary or business finance Ottawa, they have the solution for your funding needs.

Category: Business Management
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