Factoring & Account Receivables

All too often, small businesses that are just starting out experience cash flow issues that make it difficult for them to meet their financial obligations. Creditors are less lenient with new businesses than they are with businesses that have been established for an extended period of time.

Entrepreneurs that are just embarking into the business emporium are dependent on their account receivables for their business to thrive, it?s crucial to the life of their business. Most creditors or vendors, offer very short payment terms to new businesses, others work strictly on a C.O.D. basis. When account receivables don?t get paid in a timely manner, these small businesses suffer cash flow issues that result in their inability to meet their own financial obligations.

New business owners have few options available to assist them in fulfilling obligations to their creditors, not to mention in house obligations such as payroll, rent, and utilities.

Factoring account receivables is not the most cost effective solution for businesses to resolve their account payable issues, but often times it is the only resource they have. Many small businesses choose factoring as a temporary solution to get them through the rough spots, until they can assess the capital necessary to qualify for financing.

Factoring is a form of financing that businesses utilize. A business can sell it?s unpaid invoices to a finance company to expedite cash flow. This is how it works.....

A business may turn over unpaid invoices to a finance company.

The finance company will purchase the invoices.

The finance company will advance the business monies, (usually in the form of a wire transfer) less their percentage and collateral.

The collateral is put into a restricted account until all invoices are satisfied.

When the invoices are satisfied, the finance company releases the collateral from the restricted account to the business.

If the invoices are not paid (generally Net 90), the business loses the collateral and is required to repay the finance company their original investment in addition to any finance fees incurred.

Although factoring is a risk, many entrepreneurs are willing to take such risks in an effort to sustain the business until their business becomes financially stable. Many businesses overcome these financial obstacles, unfortunately there are many that can not recover, as a result these businesses fail.

So why would a company choose to factor it?s receivables? Businesses can quickly turn their unpaid invoices into cash. All invoices are not necessarily submitted for factoring. A business may choose to turn over only a portion of their invoices to be factored, generally those they consider slow pay accounts. The down side is that the business usually receive only 80 percent of the face value on each invoice.

Account receivable factoring has become increasingly popular for businesses that experience difficulty in securing a loan in the traditional manner from a bank. This is a vital resource for small businesses in today?s economy. Many of the larger corporations are also utilizing factoring of their account receivables as a resource to generate quick cash.

Donna Vestre is the President/CEO of South Coast Revenue, a Recovery Consultants Firm based in Anaheim California. To get more information on Credit and Collections, or to submit an article for inclusion in the "Guest Speakers Lounge" please visit http://www.SouthCoastRevenue.com