Accounts Receivable Financing (Factoring)
One of the most common forms of financing for a business is factoring their accounts receivables. Essentially, by selling their receivables a business is able to free up working capital for payroll, expansion, or for just about anything.
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What is Accounts Receivable Financing?
Receivables financing is a common method that businesses can take advantage of to convert the sales not yet paid into immediate cash flow. One of the preferred financial tools for businesses to obtain working capital, accounts receivable financing is very powerful and flexible. In almost all cases the credit line given will be determined by the buyers financial strength and not the client who is selling the receivable. Types of Financing for Accounts Receivables There are several forms of factoring, or accounts receivable financing and they all have their own benefits and draw backs.
- Accounts Receivable Financing (Factoring)
- Accounts Receivable Lines of Credit
- Credit Card Receivable Financing
Factoring
Factoring is basically the sale of your receivables at a discounted rate. A bank or lending institution will buy your receivables for a discount, sometimes lower than 1%. When those receivables are paid the bank keeps everything and makes their 1% (sometimes higher, sometimes lower). This form of financing is known as factoring and it does not require your credit at all. Granted, some banks may pull your businesses credit, but it shouldn’t play a role in the transaction because the only credit that matters is that of your clients. This is a sale of an asset and therefore not technically a type of financing.
Lines of Credit
Another typical transaction is a line of credit taken on your accounts receivables. Just like any line of credit it will usually be a secured line using your accounts as collateral. This isn’t a bad option if you want to borrow money and still hold on to the payments you are owed from your merchant.
Credit Card Receivable Financing
Sometimes a company will only sell or factor their credit card slips. When this type of financing is sought after clients can usually borrow up to 120% of their average monthly credit card sales. All you need in order to take advantage of this type of financing is a credit card processor and sales via credit cards. The bank will average your last 6 months or so of sales and then loan you money based on that amount. The payback will be flexible and usually fluctuates with your sales each month. Many banks make you switch to their credit card processor when you take this financing so their pay back can automatically take out a percentage of your sales every month. For example, if you do $30,000 in sales one month and $80,000 the next, the latter payment will be
