Accounts Receivable Factoring

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Accounts receivable financing, also known as AR financing, allows companies to receive immediate funds for outstanding invoices. Companies using types of financing options for accounts receivable (AR) can commit invoices to a funding partner for earlier payment.

Porter Capital believes in several particular benefits of accounts receivable (AR) factoring. A company can increase its cash flow and avoid the strain of late payments. Taking a loan against receivables helps a company obtain cash without asking clients for immediate payment.

If a company is in high growth mode, young or simply does not fall into a traditional bank box, it can utilize a loan or line of credit provided by Porter Capital.

How Does Accounts Receivable Factoring Work?

In today’s tight credit environment, more and more companies are turning to alternative and non-traditional financing options to access the capital needed to keep business running smoothly.

Several tools are available to owners of cash-strapped businesses in search of financing. Two of the most popular are factoring and accounts receivable factoring (A/R financing). Many business owners lump the two together, but few small yet significant differences exist.

Factoring is the outright purchase of a business’s outstanding accounts receivable by a commercial financing company or “factor.” Typically, the factor advances 70 to 90 percent of the value of a receivable when it purchases the receivable.

The balance, less the factoring fee, is released when the invoice is collected. The factoring fee — which is based on the total face value of the invoice, not percentage advanced — typically ranges from 1.5 percent to 5.5 percent, depending on aspects such as the collection risk and how many days the funds are in use.

Under a factoring contract, the business can usually pick and choose which invoices to sell to the factor-it is not typically an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it is paid.

The factor will essentially become the business’s credit manager and accounts receivable department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.

Contact Porter Capital today to discuss where your business may fall in the percentage range.

Benefits of Using AR Factoring

At Porter Capital, we make it easy to get immediate working capital solutions for your future business growth. AR factoring services allow you to accelerate your cash flow and build upward. Working with our account managers, you can create personalized accounts receivable funding contracts. Enjoy the flexibility of an AR factoring agreement built for your business.

Many companies experiencing rapid business growth choose accounts receivable loans to assist with delayed invoices. Our clients choose Porter Capital AR services for the following reasons:

  • Immediate cash advance: Waiting 30, 60, or 90 days for a completed invoice can limit your business prospects. AR factoring services can place invoice funding in your account in 24 hours.
  • Increased business outcomes: The opportunities are endless with faster deposits in your account. Businesses can use AR loans to increase staffing, create new products and improve workflow.
  • Collateral flexibility: AR factoring can be a debt-free alternative if you’ve struggled to qualify for traditional loans. Your factoring contract would use accounts receivable as collateral, giving your business more room to grow.
  • Capital availability: At Porter Capital, we are uniquely positioned to handle large-scale applications for AR factoring. As your long-term financial partner, we increase your capital availability as your sales improve.
  • Simple applications: With factoring services for accounts receivable, you get what you need when you need it. Our customized factoring plans are easy to apply for, saving you valuable time. Watch as your company grows alongside our team of financing experts.

A/R Financing Vs. Factoring

Accounts receivable financing is more like a traditional bank loan but with several key differences. While traditional loans may be secured by different collateral, including plants and equipment, real estate, and/or the business owner’s personal assets, accounts receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the financing company.

Under an accounts receivable financing arrangement, a borrowing base of 70 percent to 90 percent of the qualified receivables is established at each draw against which the business can borrow money.

A collateral management fee (typically 1 percent to 2 percent) is charged against the outstanding amount. When money is advanced, interest is assessed only on the amount of money your business actually borrowed.

Typically, an invoice must be less than 90 days old to count toward the borrowing base, and the underlying business must be deemed creditworthy by the financing company. Other conditions may also apply.

As you can see, comparing factoring and accounts receivable financing options is tricky. One is actually a loan, while the other sells an asset (invoices or receivables) to a third party.

However, both have many similarities. Here are the main features of each option to consider before deciding which is the best fit for your company.

Accounts Receivable Financing

  • Generally, less expensive than factoring.
  • It tends to be easier to transition from accounts receivable financing to a traditional bank line of credit when a company becomes bankable again.
  • It offers less flexibility than accounts receivable factoring because the business must submit all of its accounts receivable to the financing company as collateral.
  • Typically requires a minimum of $75,000 a month in sales to qualify, so it may not be available to small business owners.

Factoring

  • Offers more flexibility than accounts receivable financing, because businesses can pick and choose which invoices to sell to the factor.
  • Fairly easy to qualify for and is ideal for new and financially challenged companies.
  • Has a simple fee structure that helps the company track total costs on an invoice-by-invoice basis.

Industries That Use AR Factoring

Accounts receivable financing options are a common solution for many businesses. No matter the industry you serve, we can provide a factoring line of credit you can use to take care of daily operations.

Our typical clients are start-ups or mature businesses in periods of maximum growth. If you want to bridge the gap between current and potential business opportunities, accounts receivable financing can help you stand out in your industry.

Common industries using accounts receivable factoring services include:

  • Staffing: Staffing agencies manage a vast employee network, and keeping up with payroll can’t take a back seat. We offer AR financing for staffing companies to ensure fair and timely employee payment.
  • Manufacturing: Because the manufacturing industry moves quickly, so must its cash flow. AR factoring services for manufacturers provide the flexibility to invest in new equipment and maximize production time.
  • Distribution: Factoring invoices can be a helpful asset in the distribution industry. Distributors can use factoring to provide more reliable service times with upfront cash advances on their invoices.
  • Technology: The technology industry is growing rapidly. Our accounts receivable financing for tech companies can offer 24-hour approval times for optimal cash flow.
  • Gas and oil: Due to their business models, industrial and service industries are common AR factoring clients. Gas and oil factoring can improve a company’s turnaround with advanced working capital.

How to Apply for Accounts Receivable Financing With Porter Capital

Your business’s greatest asset is its product. With proper accounts receivable funding, you can improve and increase your production. Small and large companies can maximize their operations with capital advances offered by our AR factoring services. See what your business can achieve with the resources to build new growth!

As one country’s leading accounts receivable financing companies, we are committed to your business’s success. The application process is quick and easy. You can apply here directly through our website. Tell us about your business, tell us what you plan to use the funds for, and send financials to complete your application and we will review and get you funded in as little as 24 hours!

Our accounts receivable financing rates are some of the most competitive in the industry. Reach out today to learn more about our factoring contract services!

Common Questions about Accounts Receivable Factoring

Using AR financing for your business is just another tool added to your arsenal of working capital management strategies. As a business owner, you must have several options available to ensure that your working capital is managed well and is never depleted. Combined with dynamic discounting and other supply chain financing options, you’ll have a formidable set of tools to help you ensure the growth of your business.

Accounts receivables consist of assets representing the unpaid balances of bills sent to consumers. It is recorded as an asset on a company’s balance sheet, generally a current asset with payment due within a year. AR is a liquid asset considered upon determining and calculating a company’s quick ratio, which examines its most liquid assets:

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable Due within One Year) / Current Liabilities

As a result, accounts receivables are seen as highly liquid assets internally and externally, translating to potential value for lenders and financiers. Many businesses regard AR as a burden. This is because the assets are anticipated to be paid but must be collected and cannot be converted to cash at once. Due to these liquidity and business challenges, the business of AR financing is fast changing. Furthermore, other lenders have stepped in to fill the gap.

Accounts receivable financing can be structured into various forms. At its core, there are three main types which include:

1. Traditional Factoring

For small businesses, invoice factoring is the most common type of accounts receivable financing. With this type of A/R financing, a company is given around 80% of the face value of its invoices upfront. The lender or a factoring company then assumes ownership of the invoices and begins the collection process.

Once the lender or factoring company is paid the outstanding invoices from the customers, they remit the remaining 20% of the invoice value after deducting its factoring charge.

2. Asset-Based Lending

Asset-based lending, often known as a business line of credit or traditional commercial lending, is an off-balance-sheet approach that typically comes with high fees. Companies must commit the majority of their receivables to the program and have little flexibility in deciding which receivables to commit.

3. Selective Receivables Financing

As the name implies, selective accounts receivables finance allows businesses to pick and choose which receivables to advance for early payment. It differs from typical factoring in that the company receives full price for each invoice right away, rather than waiting for a partial refund after the bills have been paid. Because selected receivables financing does not appear on a company’s balance sheet, financing rates are often lower.

Companies that sell their accounts receivable to a third party or use a factoring company as a middleman are called “factors.” The factoring companies are often not banks. The business selling its receivables is called the “debtor.”

The debtor typically delivers the invoice to the factor when the goods are delivered to the customer. By doing this, after the invoice has been reviewed, the factor takes payment from the customer for the invoice.

The factor then pays the debtor for the invoice plus a percentage, typically 1% to 2% of the invoice. The factor generally makes the payment for the invoice within 24-48 hours.

A factor will typically factor in receivables up to 90% of their value. This means that the factor keeps 10% of the money owed to the business. The factor may take this amount as a fee, interest, or a combination of both.

Accounts receivable factoring is beneficial for businesses that operate in the B2B space with clear repayment terms. Financing your receivables allows you to access the cash tied up in the process of long payment cycles. Having access to those funds helps you maintain liquidity, expand your business, and pay your employees.

Approval and lending decisions are based solely on the quality of the invoice and the customer’s reliability. This makes the review process hassle-free and fast, and in some instances, you can have funds issued the same day you apply.

Any company that provides goods or services can benefit from factoring. They can also benefit from selling their accounts receivable. It doesn’t matter if you’re manufacturing, wholesaling, or retailing. It doesn’t matter if you’re a Fortune 500 company or a company that’s just starting up. You can use this financing to meet your short-term business needs.

The fantastic thing about accounts receivable factoring is that you can get them even with bad credit. The only criteria needed for financial factoring are:

  • The business is open for a minimum of twelve months.
  • Good financial relationships with your clients.

If your company has been operational for at least one year and has clients that pay, you are immediately approved for factoring. Providers do not look at your credit standing and instead focus on the credit standing your clients have with you to determine if you qualify. That’s because they base your capability to pay them back on your customer’s transaction history.

Your accounts receivable factoring application must include the following details for convenient processing:

  • Business bank statements covering two to three months.
  • A schedule of your business debit.
  • A report of your accounts receivable.

The business debt schedule gives the lenders an idea of your major expenses, such as real estate leases and other contracts, which are sorted according to the time it takes to finish paying (maturity).

Once your application is approved within twenty-four to forty-eight hours, you receive an advance of 80 percent. The remaining 20 percent is given to you (with the financial factoring fee deducted) once you have paid back the initial 80 percent.