Receivable Financing or Factoring

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Receivable Financing or Factoring
Posted by: loanuniverse Jan 26 2004, 01:11 PM
Most Small Business are not well enough capitalized, and suffer a cash crunch that makes it difficult to meet their business obligations such as accounts payable, and payroll.

If you are a small business owner, you might feel like a punching bag when it comes to dealing with your customers and suppliers. Most of your customers might take their time to pay your invoices; while your suppliers might demand payment at delivery or within very short terms.

Factoring / Account Receivable financing might be the answer you are looking for to alleviate this situation. I am going to be frank. factoring is not the cheapest way to finance your business. You can look at this type of financing two ways:

1) As the only source of financing available to your company.

2) As a stepping stone from which to move to more traditional ways of financing.

This is how factoring works.

You enter into an agreement with a bank or a financing Co. which states that they will buy all of the invoices.

You present the financing Co. with the invoices.

The financing Co. takes a discount off the top. (for example: the invoice might be for $1,000 but your proceeds will be only $960 after a 4% purchase discount).

The Financing Co. puts $860 into your checking account, and $100 into a restricted account (which is technically your money, but that they hold in case your customer does not pay the invoice within 90 days).

If the customer pays the invoice within the 90 days, you get the reserve back. If he does not you loose the reserve, and must pay the financing Co. the money they put on your checking, and the finance fee.

Author: Commercial Loan Underwriter