Why a Business Owner Will Factor Accounts Receivable

The need for factoring is usually the result of an inability of a business to access traditional bank loans or lines of credit, a trait that is of even greater importance during periodic times of economic downturn.  So it is really no surprise that modern business owners are becoming increasingly more aware of factoring as a ready form of alternative commercial finance and one which can be employed quickly in times of cash flow and working capital crisis.

From a technical financing standpoint, and as you now understand, factoring is only utilized to address the cash flow problems caused by extending terms of payment to customers and the working capital shortfalls such extensions can ultimately create.  Shortages of working capital can result in serious problems for business owners who will then seek out some financial option as a remedy.  These are problems associated with working capital shortages which can drive a small business to seek factoring.

Your Elevator Pitch Reasons for Factoring

The entire list of reasons for a business to utilize receivables finance and establish a factoring arrangement is fairly expansive.  In most cases, however, savvy brokers and consultants know working capital shortages will tend to first appear when cash is in short supply for the timely payment of employee payroll.  Below is an Elevator Pitch list so you should know.

  • PAYROLL:  Shortages of cash when payroll is due are by far the most common reason for a business to seek out the services of a factor.
  • SUPPLIER PAYABLES:  Making timely payments to suppliers or also being able to take discounts for early supplier payments.
  • TAX OBLIGATIONS:  Especially payments associated with employee 941 payroll taxes.
  • EQUIPMENT:  Raising cash through the sale of invoices to purchase equipment when leasing is not an option.
  • INVENTORY:  Purchasing inventory when other forms of lending are not available.
  • MARKETING:  Expanding and increasing marketing operations.
  • BUSINESS EXPANSION:  Raising capital to enter new markets, buy out a competitor, or other forms of business expansion.
  • INVESTMENT OPPORTUNITIES:  Raising cash for an investment opportunity such as buying a building or purchasing an additional franchise.

The “Accountant” Reasons for Factoring

One of the great benefits of being a factoring broker is that, you you learn the business the “Right Way”, you will generate at least 50% of your clients from networking.  Leads and clients will come from bank loan officer and accountant referrals.  Receivable factoring is a financial strategy that businesses often employ to manage their cash flow effectively. Factoring provides numerous benefits for businesses facing cash flow challenges or seeking to enhance their financial flexibility.

Reasons why a business owner would employ factoring using banker / accountant terminology:

  1. Improving Cash Flow:
    • One of the primary reasons businesses opt for receivable factoring is to address cash flow constraints. Instead of waiting for customers to pay their invoices, businesses can receive a significant portion of the invoice amount upfront, allowing them to meet immediate financial obligations, invest in growth opportunities, or cover operational expenses.
  2. Working Capital Management:
    • Receivable factoring helps businesses optimize their working capital. By converting receivables into cash quickly, companies can allocate funds more efficiently, reducing the need for costly loans or overdrafts to maintain daily operations.
  3. Risk Mitigation:
    • Factoring also serves as a risk management tool. Businesses face the risk of non-payment or delayed payment from customers, which can impact their financial stability. By selling their receivables, companies transfer the credit risk to the factor, mitigating the potential impact of bad debts.
  4. Outsourcing Credit and Collection Functions:
    • Factors often take on the responsibility of credit checking and collections. This allows businesses to focus on their core operations, as they no longer need to invest time and resources in chasing payments, managing credit risks, and handling the administrative tasks associated with invoicing and collections.
  5. Flexibility in Funding:
    • Receivable factoring provides businesses with a flexible financing option. The amount of financing is directly linked to the volume of receivables, allowing companies to scale their funding according to their needs. This flexibility is particularly advantageous for businesses with fluctuating sales or seasonal cash flow patterns.
  6. Access to Quick Capital:
    • Traditional financing options may involve lengthy approval processes and stringent criteria. Receivable factoring, on the other hand, provides a relatively quick and accessible source of capital. This rapid access to funds can be crucial for businesses facing urgent financial requirements.
  7. Enhancing Creditworthiness:
    • Since receivable factoring is not considered a loan, it does not impact a business’s balance sheet in the same way as traditional debt. This can be advantageous for businesses looking to maintain a strong credit profile and improve their eligibility for other financing options.

Receivable factoring is a strategic financial tool that offers businesses a range of benefits, from improving cash flow and working capital management to mitigating credit risks and gaining quick access to capital. By leveraging receivable factoring, businesses can enhance their financial flexibility, focus on core operations, and position themselves for sustainable growth in a dynamic business environment.