When a small to mid-sized business is able to make B2B sales or to obtain a private or government contract, there are endless opportunities that can open up new opportunities to grow and expand.
However, the nature of these types of contracts on 30, 60 or 90 days or longer terms can create very real challenges for the business. In that period, the business still must make payroll, replenish inventory, pay bills, and perhaps even hired additional staff or buy new equipment.
This all must happen without payment for the completed services and product based on the invoice terms. To address this gap in cash flow, factoring of receivable accounts becomes a very viable option.
How It Operates
In factoring of receivable accounts, the business sells ARs (accounts receivable) to a factor. The factor then advances up to 80% of the value to the business immediately, withholding 20% until the factor collects final payment from the customer in 30,60 or 90 days. Then, the factor deducts the fees for the service and forwards the balance into the business account.
The Benefits
As this is not a loan but an advance, there is no repayment. This allows the business to have access to the funds needed without waiting for the customer to pay. With cash in hand and no requirements to play for repayment of principal and interest as required with a loan, a business can:
- Take advantage of cash discounts or immediate payment discount for replacing inventory and supplies.
- Take on new contracts or expand their business without having to take out loans.
- Add equipment and staff to complete new work opportunities.
- Avoid late fees or payments on existing business loans or credit cards.
It is also important to remember that the factor assumes all handling of the accounts they purchase. This means that during the factoring of receivable accounts your accounting department can focus on other priorities.
