Accounts receivable factoring is the process of selling invoices to third-party factoring companies at a small discount. Ancient in its origins, receivables factoring has been the backbone of European business financing for centuries, but American companies are only now discovering its many benefits.
September 8, 2010 – Fredericksburg, VA – In today’s tight credit environment, many cash-starved companies on the hunt for working capital financing are finding their solution in the age-old technique of receivables factoring.
Traditionally associated with the textile and garment industries, account receivable factoring has recently expanded to include many different product and service-oriented industries of all sizes. Though it remains a technique largely unknown to American business owners and finance professionals, factoring is attracting the attention of business owners nationwide as its power and flexibility become more widely understood.
According to Mike Lieber, a 13-year finance industry veteran, and creator of a new business financing web site, www.smart-business-financing.com, most businesses use a form of receivable factoring every day, but it is called something else: the credit card.
“When customers buy things using credit cards, the merchants immediately sell their new receivables to the credit card companies for cash. We don’t call this account receivable factoring, but it is, in essence, what business factoring is all about – selling an account receivable at a discount for immediate cash,” he says.
Credit card companies make their money by charging the businesses that accept their cards a “fee” of a few percentage points, which is accomplished by discounting the amount deposited into the merchant’s bank account. The card issuers then collect the full amount — and their profit — from the consumer. Factoring companies basically do the same thing with business invoices.
Receivables factoring is generally more expensive than traditional business financing, with costs averaging 2- 5% for invoices paid within 45 days. But when the business owner or executive is made aware of the value of the additional services factoring companies provide – such as collections, bookkeeping, accounting, and credit reporting – account receivable factoring looks much more attractive from a cost standpoint.
More importantly, Lieber explains, the costs of not factoring invoices can be tremendous. By turning away business because a company cannot afford to extend terms, the owner or executive denies the firm the profit margin and the growth it would enjoy if it were to factor its receivables.
As if this weren’t enough, receivables factoring is also quite easy when compared to other types of business financing. Banks base their lending decisions on a painstaking analysis of a company’s financial strength and credit quality. But to factoring companies, the creditworthiness of the business’s customers is what counts.
“If a company has invoices to sell and its customers are creditworthy, it has pretty well met the conditions for a factoring program,” says Lieber.
The factoring application is simple. Factoring is fast, too: The approval process often takes less than a week.
Once a factoring program is in place, the nagging problem of working capital financing is reduced, if not eliminated entirely. A business owner will be free to seek lucrative new business that had been out of reach due to capital constraints. Another significant benefit: Factoring helps build business credit, making a firm more attractive to traditional lenders over time.
For companies that have been turned down for traditional business financing and those that are growing or would like to expand, account receivable factoring deserves careful consideration.
About AEGIS Financial Solutions, Inc.: Founded in 1998, Mike Lieber’s company has been on a mission to help people solve financial problems and get money when they need it most, using the fast and flexible resources of the cash flow industry.
Press Contact:
Mike Lieber, President
AEGIS Financial Solutions, Inc.
88 E. River Bend Road
Fredericksburg, VA 22407
mjl@aegisone.com
PH: (540) 548-2270
