If your wholesale business is in need of additional working capital, accounts receivable factoring may very well be the sensible solution you’ve been looking for. Compared to more traditional business small business loans, accounts receivable factoring carries less risk, more flexibility, and more accessibility. As long as your business is profitable and collecting invoice payments, you will most likely have no trouble qualifying for accounts receivable factoring, a.k.a invoice factoring. Arguably the only reason not to consider accounts receivable factoring is if you have no outstanding invoices from credible customers, which is the primary requirement.
The concept is simple and rational: You borrow against outstanding invoices in order to obtain funds immediately instead of later this month, in two months, or however long it usually takes this customer to pay up. Here are a few ways accounts receivable factoring can give your wholesale business a quick but effective boost in cash flow:
The main reason you can be approved for accounts receivable factoring so quickly is because the business lender, or “factor” is not basing its decision on the state of your business. Your credit score is of little if any importance. It’s the reliability of the customer in question that matters most. So, if you have worked with this customer before and that customer’s business is doing fine, it’s basically a certainty that you won’t lose any more money than the small discount provided to the factor. Even if the customer takes a bit longer than usual to send the full payment. This won’t increase the factor’s deduction, nor will it prevent the business lender from agreeing to factor this account again.
You don’t have to put up collateral, and you can continue to factor accounts if your business experiences an unexpected rough patch. In these situations, you can factor your most recent receivables and have different amounts of the money distributed at intervals that allow you to cover business expenses. Plenty of clients at United Capital Source have financed new receivables every one or two months.
Although you are technically borrowing money, accounts receivable factoring is not classified as a loan. When you look at your balance sheet, it won’t show up as “debt.” Aside from the second deduction the business lender takes after collecting from the customer, you don’t actually owe the business lender anything. This is very different from a traditional business term loan or business line of credit, where you run the risk of missing minimum loan payments or allowing interest to pile up. Accounts receivable factoring is designed to decrease your overall debt because it gives you the ability to pay business partners promptly and stabilize profits.
If you had to compare accounts receivable factoring to another business funding program, the best choice would probably be a working capital loan. You are obtaining funds that will eventually be yours so you can maintain the momentum of your cash flow or increase productivity. Rather than accumulating funds that you then owe the business lender, accounts receivable factoring accumulates funds that you can freely spend on whatever you want to improve your own financial health, regardless of whether these things will directly impact income.
When you sell an outstanding invoice, the business lender takes over all responsibilities associated with collecting the payment. This includes not only contacting the customer for the payment but also taking care of the invoice/accounts receivable ledger. You don’t even even have to document the transaction between the two parties. The funds you initially received from the business lender following the purchase is really the only thing you have to keep track of. Other wholesalers with slow-paying clients who don’t take advantage of accounts receivable factoring will likely have to bill their clients several times per month, send emails on top of invoices, or follow up with the client’s accounts payable department.
This is why it’s hard to deny that accounts receivable factoring is worth the tiny portion of income you lose to the business lender. Instead of having to experiment with numerous different strategies to see if they will make clients pay faster, you can rely on a single strategy that you are absolutely sure will work.
Yes, the amount of money you would receive with accounts receivable factoring is lower than a traditional loan. But the convenience of not having to pay any of it back and being able to use it over and over again heavily outweighs this minor flaw. And from a logistical standpoint, it’s hard to argue with the rules regarding amounts. While it might the business lender might hesitate to trust you with a larger amount that you’ve never managed before, there’s no reason not to give you the amount you’ve already rightfully earned.
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