Here is our Guide to Accounts Receivable Factoring (AR Financing).
What is AR Financing?
AR Financing refers to providing funds for a business’ activities using their accounts receivable (AR) as collateral. There are factoring companies, asset-based lenders, financial institutions, and banks which provide funding to companies and entrepreneurs, and AR are used as collateral.
You, as a business or entrepreneur, either sell your AR at a discount or borrow funds and pay interest and other charges as you draw down on your availability. Your available funds are based on your creditworthy open accounts receivable based on a borrowing base. However, a facility based on borrowing can take longer to qualify for, and you may be turned down. Moreover, borrowing creates debt on your balance sheet which can reflect poorly on your company
Like other areas, there are constant experiments and new techniques in the financing sector. One of the most successful financial solution introduced was “Invoice Factoring.” Invoice factoring or AR financing is a funding option where you get funds without getting into debt. Under this arrangement, you make use of your assets, i.e., Accounts Receivable or Invoices to raise funds. A company sells its invoices (accounts receivable) to a third-party finance company known as “factor,” at a discounted rate for immediate cash.
How Accounts Receivable Financing Works?
To give you a more concrete example, here’s how AR Financing works: Once your company finishes the project, you will raise invoices for the work done. The receiving company would then make payments on those invoices, but usually with a delay in payment of 30-90 days. During this period, your company may struggle to keep the ball rolling. You must pay your employees, make purchases for next orders, and cater to other miscellaneous expenses.
This is where Finance companies (Factors) come in. They aid your business by giving advance payments instead of forfeiting the right to collect invoice payments. Hence, you will sell the unpaid invoices to the finance company called factor. Factors can pay you about 70% to 90% of the invoice value upfront. They, in turn, will take responsibility for collecting the money from your clients according to the agreed due dates. Upon collection, the factor will deduct the advanced amount and their fees and will return the remaining balance to your company.
Who Can Benefit From AR Financing?
Factoring is a standard business practice across many industries like transportation, oilfield, textiles, manufacturing, staffing, etc. Companies of all sizes and nature use factoring to gain quick access to cash. Hence, whether you are old or new in business, whether you have a small, medium, or a large business, you can opt for AR financing.
What is The Need For AR Financing?
The most common reason for the downfall or closure of a business is the shortage or slow movement of cash flow. Adequate and consistent Cash flow not only ensures growth but the survival of the company as well. No one in today’s economic environment is self-sufficient. Opting for Invoice factoring is not a sign of the weak financial status of any company. Most companies are using this option to meet their working capital requirements. With the help of Invoice financing companies can dedicate their time and effort to efficiently completing the orders they have in hand. The company can also utilize the resources and time in exploring growth opportunities. Invoice financing has been the most preferred option not only in emergencies but also as the primary working capital solution to avoid dips in cash flow and financial problems. Converting receivables into early cash puts the business in a better position.
Types of AR Financing
Invoice factoring can be of two types: Recourse Factoring and Non-Recourse Factoring.
Recourse factoring is a traditional factoring, where a factor returns the unpaid invoices to the company. If your customers are unable to clear invoices, then you bear the risk. Hence, the accounts receivable which become bad debts is your peril.
Non-Recourse Factoring, on the other hand, is an arrangement where you, as a company, do not bear any of the credit risks of unpaid invoices. The factor takes any loss due to outstanding invoices because of your customer’s bankruptcy or insolvency. You, of course, are still responsible for your products or services meeting your customer’s quality, quantity, and contractural timeliness expectations.
Although you can choose to opt for any invoice factoring, it is more sensible to opt for the second option of Non-Recourse Factoring.
Why is Non-Recourse Factoring a Better Choice?
Many once-healthy companies file for bankruptcy. Sports Authority, A&P, Kodak, General Motors, Radio Shack, Linens n Things, Circuit City, Blockbuster, Adelphia; the list is endless. If you are a startup, you may not be able to gauge or may not give importance to the creditworthiness of your customers. Hence, until the invoices are paid, there is a constant fear of delay in payments or not getting paid. Some customers are just slow in payment.
Keeping track of your customers and following up with them for payments is a time-consuming exercise. Non-Recourse factoring frees you from these kinds of worries. Once this option of accounts financing is taken, you can forget about keeping track and worrying about your customers not paying or going bankrupt. This, in turn, gives you time and confidence to fulfill your future orders and plan growth opportunities.
What Happens if The Client Does Not Pay?
We at ARfunding.org, offer a Non-recourse program through credit protection facility. We use credit insurance for both your and our protection. Bottom line is you do not have to worry about your customers not paying. Unless there is a quality issue with your product or service, that is your responsibility. We do proper research and evaluate the creditworthiness of your customers. Our experience has taught us that customers who have a good credit history do not turn bad overnight. Usually, the delay or dispute is due to improper paperwork or some error in different departments.
We take ownership of not only providing you advance against invoices but also managing accounts receivable. The probability of error reduces significantly. Mostly, we can reduce Days Sales Outstanding (DSO) and achieve more timely payments. Nevertheless, we are not a collection agency and do not harass your customers to make payments. We aim to keep your customers happy and always deal with them courteously and professionally.
What is Accounts Receivables Management?
Accounts Receivable management is a broader term as compared to Accounts Receivables factoring. We offer a total working capital solution for your Accounts Receivables along with Non-recourse factoring program. Hence, at ARfunding.org, we not only collect payments from your customers, but we do much more without any additional charges.
For example, we evaluate the creditworthiness of your customers. Each of your customers would have a pre-determined credit limit. We have a policy where the amount we advance you are covered for bankruptcy protection. With our organized and proficient approach, we will be able to provide your sales department a list of pre-approved customers. Can you imagine how much time and money you should be able to save with this program? You do not have to worry about AR monitoring and reporting as we perform all necessary task through our team. We manage AR credit protection, collections, and cash advances. Our clients include Wal-Mart, Comcast, Neiman-Marcus, Textron, Time-Warner, AT&T, the US military, and many state/local/city governments, to name a few.
We assign an educated and experienced relationship manager to your account. Hence, you do not have to deal with numerous people. There is always one point of contact for all your queries and worries. Also, you will have direct online access to your reports 24/7. You are provided with the unique access code to monitor reports. You can also ask for the reports to be faxed or emailed to you anytime.
How to Choose an Appropriate Factoring Method and Factor
When you contact ARfunding.org for Invoice Factoring, we ask you questions about the nature of your business, and who your clients are. This, in turns, helps our experienced representatives to offer you appropriate factoring method. We have been in business since 1998, and you can trust us to provide you with the most efficient financial solution.
Since AR financing is such a common practice, there are many factoring companies available to choose from. It is imperative to do proper research as well as compare all terms and conditions and fees etc. In our tenure of 20+ years, we have come across many small factoring companies coming and going out of business for a simple reason that they do not have enough funds. We have funded over $2,000,000,000 to 2100+ entrepreneurs, and we plan to be in business for many more years to come.
Another critical fact to consider is that less than 20% of factoring companies qualify for credit insurance. If they are not financially secure, they cannot protect you.
ARfunding.org uses credit insurance to protect you and us. Getting financing option for startup companies is not an easy task, but we are startup-friendly. If you can get to $30,000 in sales per month quickly and we think you can grow the business, we can fund your start by buying good B2B or B2G invoices.
In our 24+ years of experience, we have funded almost every industry. For example, staffing, importing, guard services, IT, Cable, manufacturing, telecommunications, wine & spirits, and more. We have Industry-Specific Expertise.
Banks and other factoring companies often shy away from lending or advancing money. Also, if you have high client concentration, you only have one or a few creditworthy customers. Since our Credit Protection Program; our professional Relationship Managers verifying every invoice with your client does not hesitate to lend you funds even if you have high customer concentration.
At ARfunding.org, we provide fast funding and decision-making process. We are also renowned for our professional dealing with the clients of our customers. We also welcome government receivables. If you have an existing loan, a line of credit, or any tax-related issues, we can still help you with funding.