Because of their lack of financial sophistication and size, today’s small businesses continue to face the hardships brought on by current economic challenges. Many firms struggle to maintain their bank credit facilities, and securing a new line of credit or increasing a company’s current limit is nearly impossible. So if the lending wells have dried up, what’s a small business owner to do? Capitalize on the benefits of accounts receivables factoring.
Once a small business owner has been approved by an accounts receivable factoring firm, the basic invoice factoring process is as follows:
- A small business owner’s customer requests goods or services from the company.
- If it’s a new customer, the business owner should request a credit check and approval by the invoice factoring firm. Once approved, the company completes the service or delivers the goods.
- The business owner issues an invoice, reminding the customer that their receivable has been sold to and will be collected by the factoring firm.
- The business owner submits a schedule of accounts for purchase to the factor, including the supporting documentation (purchase orders, invoices, time-sheets, etc.).
- Upon verification of invoices for pre-approved customers, the A/R factor will advance funds within hours.
- The factoring firm provides all accounts receivable and collections services as required.
- In most cases, the customer makes payment(s) directly to the factoring company’s lock box.
- Upon receipt of the payment, the invoice factor remits the difference (reserve) between the collected amount and the advance, less the discount fee.
It’s easy to get things started. In most cases, a business owner needs only to complete a brief application and present a current accounts receivables aging report to begin the process. As if a quick approval process wasn’t good enough (banks can take months to approve a loan), there are numerous additional reasons why factoring invoices is an attractive alternative financing option for small and medium-sized business owners—the first being that entrepreneurs with less-than-perfect credit can qualify for financing based on their customers’ creditworthiness. This is simply not the case when looking for a bank loan. Traditional lenders review the applicant’s financial strength in combination with the company’s operating history before they are willing to extend credit.
Furthermore, healthcare invoice funding also gives business owners the ability to offer credit terms to their customers. Especially in today’s economy, customers appreciate the value of having a 30-day grace period to make a payment. Because a business owner receives up to ninety percent of the invoice upfront each time he/she factors, their cash flow remains unaffected by the net-30 terms.
Additionally, accounts receivable factoring helps business owners build their company’s credit. Once an entrepreneur begins healthcare factoring and has adequate cash flow, he/she is able to pay vendors on time, establishing a good credit history with them. This makes it so much easier for business owners to get credit from other vendors and increases their chances of borrowing from bank in the future.
All in all, invoice funding instantaneously relieves business owners from many of the stresses involved with managing working capital. The ongoing factoring process is straightforward and easily adaptable. Accounts receivable factoring gives small business owners the ability to control their company’s cash flow as the business grows, while simultaneously improving their creditability.