As a business owner, from your perspective, money owed to you for services rendered may seem like a (temporary) liability; however, this can actually be beneficial with a method called factoring. As long as you have the record of debt properly detailed on a balance sheet, it can be used as collateral in a loan agreement – which is very helpful if you’re currently cash-strapped but need to continue operations.
Who Can Use Factoring?
Any business with outstanding receivables is eligible for factoring; the latter is, after all, big business – there are plenty of financial companies that are willing to assume your receivables – under certain industry conditions, of course, as well as conditions that may be exclusive to that particular lender.
Those with tight cash flow – such as sole proprietorships or SMB startups – stand to gain the greatest benefit from receivables factoring. The amount of funds you’ll get is just a bit less than what your customers owe you since it is minus the fee. The service helps to untie your capital from outstanding debts.
What Are The Conditions for Factoring?
Generally, there are three conditions that need to be met to be able to take advantage of factoring; they are, of course, tied to the amount of risk that the financial company is willing to undertake when they assume your receivables account:
- The outstanding debt cannot (usually) be from a person; it has to be from a business with assets.
- Tied to the above, the financial company loaning you the money will further tailor the agreement based on the creditworthiness of your debtors. If, for example, you sold some products or services to a national chain, then the terms of your factoring agreement may be very favorable. If your debtors are small, unknown corner stores – not so much.
- You can expect to remit about 2% each month to pay the fee incurred by establishing accounts receivable asset with the lender. Use software programs to determine if this is worth it, based on how much other loan types might save you.
For a greater understanding fo the multiple ways in which you can improve cash flow for your business, contact us at Prime Wealth Development today.