Converting Accounts Receivable Into Working Capital with Factoring

Convert your Accounts Receivables into Working Capital with Factoring What does a small business do when it wants immediate cash to make critical business investments that can trigger growth? One course of action is to approach a bank for a small business loan. The problem in this case is banks might or might not lend to your small business and even if they do, the process is long, complex and you won't get hands on the amount quickly enough. The solution in this case lies in leveraging your business assets and converting them into cash. One such asset is your accounts receivable, which can be turned into working capital with factoring. What are Accounts Receivables? Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts receivable are business assets. Company A will record a sale and will also record an Company A sells merchandise to Company B on credit. account receivable. Businesses and Cash Flow Problems Small businesses need factoring when they experience cash flow problems because of the following factors: Factor Why it Causes a Cash Flow Problem There is a direct link between low profits or losses and cash flow Low profits or (worse) losses problems Remember - most loss-making businesses eventually run out of cash This happens when a business spends too much on fixed assets. Production capacity which is not being used does not generate revenues - so is often a waste of cash Over-investment in capacity Holding too much stock ties up cash and there is an increased risk that Too much stock stocks become obsolete Customers who buy on credit are called "trade debtors" Offering credit to customers is a good way to build revenue, but late payment is a common problem and slow-paying customers put a strain on cash flow Allowing customers too Much credit This occurs where a business expands too quickly, putting pressure on short-term finance. For example, a retail chain might try to open too many stores too quickly before each starts to generate profits ! overtrading Predictable changes in seasonal demand create cash flow problems - but because they are expected, a business should be able to handle Seasonal demand them The Solutions Lies in Converting their Accounts Receivables into Capital with Factoring What is Accounts Receivables Factoring? Business approaches a factoring company and offers to sell its recently billed receivables. Factoring company evaluates the receivables and if it finds them worthy of the risk, the business is accepted as a client. The bulk of the value of the current receivables is provided in a lump sum payment. The business's customers remit payment to the factoring company. As the invoices are paid, the factoring company issues additional payments to the client, and keeps a portion of the collected funds as payment for the service. What Types of Companies can Benefit from Accounts Receivable Factoring? Rapidly growing Concerned about adding fixed costs Have a lengthy manufacturing cycle Seasonal Start-ups Strained by slow turnover of receivables Hurt by high bad debt losses Spin-offs Saddled with a large Undercapitalized customer concentration Benefits that Invoice Factoring Brings to the Table Quick cash, usually within 24-48 hours. Get cash without incurring debt. You get access to cash without close No long term contractual obligations. scrutiny of your company's financials. Factoring helps businesses with little or no credit history. You can use cash as you see fit, without any restrictions. Any number of invoices can be submitted for factoring. The Rise and Rise of Factoring Industry The world factoring total stands at €2,132,231 million or US$ 2,811,346 million, in other words, well over 2 TRILLION, whether in Euro or in U.S. dollars. Major markets with spectacular growth were Hong Kong Russia Poland China Mexico [+69%) (+66%) (+37%) (+26%) [+24%) The major EU countries and the U.S.A. remain strong "users" of factoring services. Morgan Stanley estimates that factoring produces $13-15 billion per year (United States). Conclusion Factoring is one of the better financing options for companies who want to maintain a steady cash flow. It's no secret that small businesses find it difficult to get loans from banks, and if they want immediate cash, they need to take the alternative financing route. Why be at the mercy of banks and other lending institutions, when you've got accounts receivables factoring as a quick, no-nonsense, and absolutely convenient way of getting access to much needed working capital? 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