How Accounts Receivable Factoring Works to Improve Cash Flow

Given the current economic condition, numerous companies will really face shortages in the start-up phase. Others, on another note, have issues with cash so they can't develop their business.

Enhancing your cash flow in the year 2010 should be a priority, as well as collection efforts or even obtaining professional help with financial forecasting. However, there is one strategy that works every time: accounts receivable factoring.

When these alternatives aren't sufficient, factoring can help. The practice of selling accounts receivables, or invoices, in exchange for instant cash, is a relatively quick and easy solution for any cash-strapped organization. After all, you could always make use of the money now (instead of waiting for 60-90 days) to purchase supplies and keep the business running.

Factoring comes with a price, but in the growth stages of a small business, it is better than a loan. Factoring companies, as in any commercial financial institution, charges a fee for its services.

In any accounts receivable factoring engagement, the factoring company, like the Interface Financial Group (IFG), would first examine the creditworthiness of your customers by checking the invoices. Then, you must prepare these documents: current financial statement, accounts receivable aging report, certificate of incorporation or partnership agreement, proof of insurance, invoices and other pertinent business documents.

Factoring companies take on the responsibility for collecting your receivables, so they will want to make sure your customers pay their invoices in a timely manner. Funds can be given to you in as little as 24 to 48 hours - basically after knowing which invoices will be purchased.

The factor may pay you 80 percent of the total amount of your invoices now, and then give you the remaining balance when the customers pay their invoices. Fees shall be subtracted from that amount, of course.

Normally, you will pay anywhere from 3-7% percent or more of the total the factor collects. Factors' fees differ depending on the value of your invoices, the creditworthiness of your customers and the number of days in your cycle - for example, 30, 60 or 90 days.

Remember,however, that not everyone will take advantage of accounts receivable factoring. Firstly, this option is limited to B2B companies. Second, interest rates are almost always larger than those imposed by traditional bank loans. But, since most factored invoices are paid for within 90 days the total amount of interest paid is generally smaller than that of a longer term bank loan.