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Factoring Accounts Receivable When Needing Cash
The lifeline for any company is their ability to convert their receivables into cash. Receivables factoring is an important part of success. Basically, this is a process where a good or service is provided and payment for it is not made at the time of service. As a result, the debt becomes a claim.
Effective management of this part of the books is important to maintain a steady flow of cash coming into the business. Many companies have turned to payment collection methods at the time of service. This greatly reduces the claim and the risk of non-payment.
Point of service systems require the customer to pay for the service in advance. In some cases, such as health care, the point of service accepts partial payments. This is because many times the full cost or reimbursement for services is not determined until after the patient has been treated or discharged. Retail is different because you usually can’t pick up an item without paying first.
In retail settings, point of service is nothing new. In fact, many businesses have credit and debit card devices installed on their POS systems. This interface helps them accept electronic payments, personal and business checks for the item being purchased.
Accounts receivable management is usually factored and recorded with a formula. This formula gives an indication of how timely A/R is collected. Days in A/R reflect the ability to convert that liability into cash. So, if the days in A/Ru are 35, it means that it takes an average of 35 days from the moment the product or service is provided to the moment it is paid for. The goal is to make that number smaller. The lower it is, the better the sign that cash is coming in the door.
Improve your cash flow with invoice factoring
Invoice factoring, that is, the sale of invoices to another company (factor), can be an excellent cash flow booster. There are several ways to get cash quickly when you work for an accounts receivable company, but factoring is one of the easiest methods. It’s an invaluable tool for a growing business that has numerous benefits.
Sale of receivables is preferable to loans. First of all, it is easier because it does not require any credit history or collateral. Second, there is nothing to return because it is money that already belongs to the company. The buying company will redeem the invoices designated for collection from accounts receivable, so that is the amount received, less any fees or percentages taken for the transaction. It should not be returned because the invoices are for products or services already provided.
It doesn’t take much work. A lot of paperwork is eliminated because companies don’t have to send first, second and final payment reminders. Statements are also eliminated. The money is handed over, and the factor is responsible for collecting the money.
Companies often need thirty, sixty, and sometimes ninety days to pay their invoices. As those days count, businesses can suffer and sometimes fail. Small and medium-sized businesses are most vulnerable to cash flow problems and a week can significantly influence their decision (or need) to close their doors.
Money is available immediately. Instead of waiting for customers to pay their bills, businesses can spend money on key aspects of their business including equipment, marketing services and other valuable supplies to help grow the business. Waiting to buy these things is not necessary when waiting for receivables is eliminated.
Receiving money instantly also eliminates debt. By getting the money faster, the debt can be erased faster by paying less interest. Many companies also decide to sell their receivables in order to avoid sending invoices to collection due to non-payment. No business should suffer because a customer doesn’t want to pay for a product or service they’ve already received.
Factoring can save a company money. Although the company will lose some of its receivables due to fees, it can save that money through supplier discounts. Many vendors and suppliers will reduce bills by a certain percentage by paying on time or earlier than the scheduled due date. The easiest way to do this is with the improved cash flow that factoring allows.
There are many companies that offer invoice factoring, but research is key. Free offers are available with almost all of them, so it’s important to shop around. Each will have different caveats when redeeming the receivables, including the amount they will purchase as well as their share. Every business is in business to make money, so it’s important to remember whose business comes first!
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