Accounts Receivable Financing

Accounts Receivable Financing is a type of business loan where a company is able to borrow money using there accounts receivables as collateral. Accounts Receivable Financing is available to both large and small firms, and this website will explain how these loans work.

Accounts Receivable Financing - Info
Accounts receivable financing is essentially the selling of invoices to receive immediate income and capital for a business. Also know as Invoice factoring, it is a billion dollar industry. Unbeknownst to most small companies, invoice factoring has been around for years and is often utilized by larger companies. It is only recently that this service has been offered to small companies which have a great deal of trouble getting funding from banks and financial institutions.

Accounts receivable financing is based on the overall credit rating of the invoiced customer and not solely on the credit rating of the client company. This allows client companies with less than two years of history. It also allows companies in financially difficult times to utilize accounts receivable financing.

The overall funding process is simple enough. Your company invoices your customer for services or goods you provided. Your company sends in the invoice to the factoring agent. Funds are then either wired or deposited directly into your account. The process takes about 48 hours to receive the funding. Once the invoice has been paid by your customer, the factoring agent takes out the factoring fee, generally 2% to 3% from the 20% to 25% of the invoice face value not funded. Any remaining funds are then transferred directly to you. Again, this process takes about 48 hours.

Accounts receivable financing involves the act of selling of outstanding invoices to other companies that then take on the debt owed. Companies that offer accounts receivable financing solutions buy invoices at discounted rates and the money serves as a source of fast cash for businesses in need of cash.

Factoring versus Bank Loan
Many small businesses have difficulty acquiring loans or lines of credit from traditional financial institutions. There are a number of reasons for this. Credit history, length of time in business, collateral, and the type of industry all play heavily into a bank's decision to loan or not to loan money.

Additionally, banks may be ill equipped to handle the job of monitoring invoices and inventory of a particular industry. They may not want to take on the risk associated with that type of funding option. Furthermore, they may not fully understand the industry that your company competes in. To a banker, a lack of understanding equals greater risk and greater risk often times equals a denial.

By contrast, factoring companies rely on the creditworthiness of your clients. There are no rigid standards to meet on your company's part. New business and old businesses alike can benefit. Furthermore, some factoring agencies actually offer factoring solutions to companies under bankruptcy protection.

There are a number of benefits derived from the use of accounts receivable financing solutions. First, the company that is selling invoices can rid themselves of the hassle of handling various debts-the debts become the problem of the company offering accounts receivable financing solutions. Also, a company in need of money can get their hands on some fast cash, thanks to accounts receivable financing services.

How it Works
The initial application process is completed relatively quickly. The paperwork is minimal for the world of corporate finance. Most of the paperwork should already be on hand or easily obtainable. Paperwork includes a two year history, if applicable, of the company P&L, balance sheet, and income statement. Prior invoices may need to be submitted so that the factoring agent may get a better understanding of the invoicing process and format used in your industry and by you and your clientele. The packet is then reviewed by the factoring agent. Upon approval, a Letter of Intent (LOI) is submitted to the client company. This LOI is then signed by the company and returned. A contract is submitted. Due diligence is performed one last time by the factoring agent. Final approval is granted. The invoice factoring begins. The entire application process takes as little as two weeks. If open invoices are submitted during the application process, funding for these invoices generally takes a few additional days due to the newness of the account.

The funding process takes 24 to 48 hours. This is the amount of time from submission of the invoice until funding is received into the business account. As any business owner can tell, this is a fraction of time when compared to waiting 35 to 45 days for payment of an invoice.

Funding amounts vary depending on the terms of your businesses loan. Typically, the factoring is done at 80% of the face value of the invoice. Say for example the invoice your company submits to the factoring agent is for $200,000. The amount of funding your company would receive initially would be 80% of the face value which would be $160,000. Once payment is received by the factoring agent, the factoring fee is taken out of the remainder. This can be anywhere from 2 to 3% of the funding amount. At a 3% funding rate the fee would be $4,800. This amount is then deducted from the $40,000 and the remainder is transferred directly into the account.

Benefits
Accounts receivable financing offers the client company numerous benefits which help ensure the growth and the stability of the funded company. By factoring invoices, money can be obtained more quickly and provide much needed capital for the day to day operations of the company. The client company may actually be able to reduce overhead by paying some of their own invoices early enough to receive any discount offered.

The client company enjoys the benefit of an increased credit rating by having the funds available to make payments on time and even ahead of schedule. In addition, since the client business now has the capital to operate on hand there is no reason to seek outside funding such as venture capital. Such funding options often require the relinquishment of equity in the company. Equity now can remain with the business owner.

Client companies also can reduce the amount of early payment discounts they offer their customers. This saves the client company money while still allowing that company to receive the funding needed to operate. Additional savings can be realized by volume discounts on purchases due to increased cooperating capital.

Which Companies Are Eligible?
While any company can benefit from accounts receivable financing, some company's find the experience more fruitful than others. Industries such as construction, trucking, manufacturing, textiles, staffing, and engineering companies utilize accounts receivable financing on a daily basis. As well, any business which has customers with a solid rating or contracts with the government and doesn't want to wait for 30 to 90 days for the invoice to be paid can reduce cash flow stress through this type of funding option.

Companies that do not meet the traditional criteria for a bank loan often find that this type of funding is able to meet their needs. Additionally, businesses with credit problems or less-than-perfect credit enjoy the fact that the funding is based on the credit rating of their customer. This takes a great deal of pressure off the client company.

Furthermore, companies that are experiencing a period of hyper-growth and are having trouble keeping up with the financial needs of the business tend to do well under these types of programs. This allows the company to continue on with the growth without acquiring vast amounts of debt.

Commercial Invoices versus Government Invoices
It would stand to reason that an invoice is an invoice regardless of whether or not the client is a commercial entity or a governmental agency. This, however, is not the case with invoice factoring. Factoring government invoices requires much more forethought and planning on the part of the business owner than say an invoice to Coca-Cola.

The reason this is true is because of the government regulations required to complete the initial funding requirements are monumental. It is best to go ahead and negotiate the idea of factoring invoices before award of the contract. Doing so will alert the contracting officer ahead of time so that fewer problems arise later on during the fulfillment of your contract to the government.

If however, your company has already been awarded the contract and has begun performing the services required, you may be in for more of a challenge than you'd hoped. It is not a simple matter of faxing the latest invoice off to the factoring agent and waiting on the funding to arrive. Speak to the factoring agent ahead of time about the contract. Additional forms need to be submitted to the contracting agency of the government department you are contracted with. Essentially, a modification must be completed prior to factoring the first invoice. As with most things dealing with government contracting, this process may take several weeks to complete. Be patient and work with both the factoring agent and the contracting agent. It can be worked through for long term results.

Another issue to be concerned about with factoring government invoices is the businesses Cage Code. In the paper reduction world of the government only one account is authorized in conjunction with this code. Once the payment is sent it will go directly into that account. Hence, once the factoring has begun for your company and you modify your CCR registration to go directly to the factoring agent, as required by the factoring contract, all government invoices must then be processed through the factoring company. Say, for example, your business was awarded a $1 million contract which required your company to go out and begin accounts receivable financing in the first place. In the meantime, during the life of this big contract, your company continues to sell smaller items to the government. The average invoice amount for these projects is $20,000. After a few invoices under the bigger contract have been funded, you've been able to shore up your reserves to a point where you don't particularly need to factor the smaller invoices, especially at a 3% funding fee of the invoice value. Whether you choose to factor the invoice or not, the payment from the government will still go to the account on record for your business's Cage Code. If the factoring agent has not funded the invoice they will then transfer the funds directly to you. This process will add at least 48 hours to your payment being received.

Possible Problems
One of the pitfalls with factoring and one not readily discussed by factoring agents can occur, and usually will occur at the worst possible time for the business and produce a situation where the invoice in question is simply not funded or funded at a fraction of the face value. The problem is not with the invoice, but with the company to which the invoice was issued. Likewise, this typically happens with factoring accounts that have little activity or are at the beginning of the relationship.

Accounts receivable financing is based primarily on the credit rating of the company being invoiced. This allows for the client business to establish credit in their name without having to meet overly stringent regulation. The situation arises when the company invoiced does not meet the requirements of the factoring agent.

Say for example, you've created a teaming arrangement with an 8(a) company in Anchorage, Alaska. Your headquarters are in Atlanta. Your factoring agent is in Florida. Chances are the factoring agent has never heard of the 8(a) company and has no prior knowledge of their services of reputation. The factoring agent then researches the invoiced company. If he is not satisfied with the information he gets back, perhaps he pulled an incomplete file, there is a good chance that the funding will not happen.

On the flip side of this coin is a company the funding agent does know a good deal about. Unfortunately, everything he knows is negative. The company has recently lost major contracts. The company has a habit of paying late on most invoices. In this case, you will have a great deal of trouble getting any invoice sent to this company funded by the factoring agent.

Recourse versus Non-Recourse
Unfortunately, businesses do fall on hard times and the companies your business deals with may be no exception. What happens if the company invoiced is unable to make payment on the invoice in question? The answer depends on the terms and conditions of the factoring line. It's a difficult situation to deal with, but one which must be addressed early on in the factoring relationship. This will help avoid nasty surprises if and when the situation arises for your company.

Recourse factoring allows the factoring agent to come back to the client company for payments should the invoice go unpaid. This can come as quite a shock to the client company if this situation is unforeseen. The client company must then pay back the funding or submit another invoice of equal or greater value. This type of funding holds the least amount of risk for the factoring agent thereby reducing the amount of fees charged.

Non-Recourse transactions transfer the entire amount of solvency directly to the factoring agent. Should the invoice go unpaid, the factoring agent cannot come back to the client company for payment for any reason. The risk for this type of factoring is the greatest for the factoring agent causing the fees to be at their highest level.

A third option has emerged to the recourse dilemma. This is the option of Modified recourse factoring. With this option the client company purchases insurance which covers all parties should the invoice go unpaid. In the event of the invoiced company filing for bankruptcy, the insurance would cover the amount of the funding.

Choosing which factoring recourse option is best for you depends greatly on your individual situation. If you feel very confident in your clients ability to repay the invoice, then there may be little question of recourse in your mind. If however, you are unsure of your client and their ability to pay timely or at all, you may want to consider your options. Many factoring companies do not offer non-recourse factoring so shop around for the company which offers the best value for your particular situation.

What to Look For in a Factoring Company
The use of accounts receivable financing services is a way for a business to clear up any debt they may have in addition to providing the business with money that it requires to continue to be successful. There are literally hundreds of companies nationwide which offer the service of Accounts receivable financing or Invoice factoring. Many will claim to offer the fastest turn around time on funding or the lowest rates available. Be cautious and take your time to find the right company for your individual needs.

First and foremost, become your own expert in the matter. Investigate local companies which offer this service. Is it possible to have a face to face interview with a representative? If so, what information are they willing to provide you with up front? Factoring company representatives should be able answer all the questions you will have before and during the application process. A face to face meeting can help determine whether the relationship will be a beneficial one for both parties involved.

Avoid high pressure sales techniques when seeking accounts receivable financing options. Your business is not buying a used car after all. The invoices you submit to your customers are the very heartbeat of your company. You should not feel pressured into this type of funding option. You may find that after a thorough review of all of the issues involved that invoice factoring is not a good fit for your situation. That's a perfectly legitimate position to take. No one should make you feel guilty or pressured into signing up for the funding if you are not comfortable.

Lastly, remember than the company you choose to use for invoice factoring will be one with whom you will develop a long term relationship with. Make sure that this is a company that you can trust. You need to do some research. Contact the Better Business Bureau and make sure that there are no complaints. A company should always research the accounts receivable financing company they plan to work with long before they enter into any negotiations. Contact the state business license office and make sure that it is a reputable company that has been around for awhile. Finally, ask for local references that you can call and inquire about the quality of service and the support through the overall process. No one can give a bird's eye view like a current customer.


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