How Does Accounts Receivable Factoring Work?
Posted by admin on Jul 9, 2008
So what exactly is accounts receivable factoring? Well very simply it is the process of obtaining funds by selling your company’s accounts receivable. To go into a little more detail a company takes the outstanding invoices it is owed and sells them to a third party company called a factor. By doing this the company selling the invoices receives an up front payment on the invoices instead of waiting thirty or more days to be paid. When the invoice does come due the payment is sent to the factor instead of your company. Sounds great right? Well it’s not all roses. If you’re considering going this route you’ll need to do your homework. If you don’t you might pay a pretty hefty price.
Now depending on whom you talk to the accounts receivable factoring business is either the greatest thing since sliced bread or in the neighborhood of borrowing from a loan shark. Each experience is different and some companies are on the up and up while others you won’t want to touch with a ten foot pole.
So you can better understand the experience we’ll walk you through what happens. Now assuming you’ve got a factor you’re intending to work with we’ll start from the point of the sale. You’ve just finished a large project for a customer. You issue your bill to them. The first thing the factor will want to see is a signature showing that they were satisfied with the work. But let’s say you sold them a product that was delivered at the dock. A receiving clerk’s signature is not going to cut it. You’re going to need the signature of the person that authorized the purchase to begin with. They’ll need to sign the invoice and some other form of document verifying the purchase was legit and they plan on paying for it.
Next you’ll need to fax those documents to the factoring company. But you can’t do this from your office because you might have forged those signatures. No they need to be faxed from the customer’s office. And once the factoring company does receive the documents they may still want to call and verify the purchase. Now if the purchase was for a significant amount of money all this hassle may be worth the trouble but what if the purchase was for a few hundred bucks. Not worth the trouble you say? Well we have a problem with that too.
You see when you first sign up with a factoring company they want to know what companies you do business with. And which of those you want to have the invoices factored. This is because those companies that you decide are worth factoring have to be notified that this is going to be the case. And the factor will want to run a credit check on the company. Your customers will also be notified that they must now send their payments to the factoring company instead of you. This task also will be left up to you. The quandary is this if you don’t factor an invoice the company still must send the payment for it to the factoring company not to you. This will actually cause that particular payment to take longer than necessary to reach you because it will go to the factor first and they have to release it to you.
Once your invoice has been submitted to the factor from your customer’s location you need to check and make sure it was actually received and there are no problems with it. After the factor receives the invoice it should only take about twenty-four hours to be approved. Most factors have a cut off time each day to receive an invoice if you want to receive your money the next day.
After the factoring company has approved the invoice you will receive a wire transfer to your bank. From there the money is yours to do as you will. Many factoring businesses would like you to believe that using accounts receivable factoring is a great way to get the money you need to grow your business. The truth is that it is not suitable for many types of businesses. Your billing methods need to be very straight forward to help make factoring work. And it helps if you issue fewer invoices but for large amounts of money. Otherwise the leg work involved can take you away from what truly matters. And that is focusing on your business.
Cash Miller is an experienced entrepreneur and speaker who has spent over a decade as a small business owner. His years of experience in small business cover a variety of topics. If you are looking for more small business information you can go to http://www.smallbusinessdelivered.com
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