Information on Accounts Receivable Financing
If you have accounts receivable in your small business, you have a bankable asset. You can sell accounts receivables to a finance company. This process is called financing accounts receivable, or "factoring," and it can provide a ready source of operating cash to a company that routinely takes payments over time.
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Process
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If your business routinely sells products or services on credit or bills customers for services rendered or goods provided, you generally have many agreements to pay you over the next 30 to 90 days. However, your business may need quick operating capital. Many times, banks will not approve loans in time or have onerous paperwork requirements. An accounts receivable financing company, or factoring company, may be able to purchase your accounts receivable for 70 to 90 percent of their face value.
Advantages of Financing Accounts Receivable
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Factoring your accounts receivable can be a convenient source of operating capital. It can also help free up employees from collection activities for more profitable projects. Having the flexibility to obtain cash for your accounts receivable -- often within 24 hours of initiating the transaction -- can help you take advantage of discounts, pay taxes by the deadline or even help you make a tough payroll.
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Disadvantages of Financing Accounts Receivable
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Accounts receivables can be an expensive source of credit compared to other forms of financing. Even if you get 90 percent of the value of your next 90 days of accounts receivable, it equates to 10 percent interest paid on a three-month loan. The same rate extended for a year would equate to an interest rate of over 40 percent. However, you may save on the labor involved in collecting your accounts receivable, and the factoring company takes on the risk of any slow payers and defaults.
Leveraging Accounts Receivable
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Some programs encourage business owners to take a loan against accounts receivable and use the proceeds to purchase an annuity or life insurance policy. The idea is to take advantage of the tax deferral of the growth in the annuity while also moving money out of the business to where it may enjoy better protection against the claims of creditors. If you are considering this arrangement, pay careful attention to the fine print and to the hidden costs, including termination fees, the callability of the loan and the rate of interest that will accrue on the loan.
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