How Account Received Factoring Can Help Businesses?

Particularly in difficult economy situations, banks may restrict loan applications and provide financial helps only for trusted businesses and not start-ups. This has caused business owners to pay expenses on their personal fund. This leaves very limited room for growth and it is a good idea for new business owners to look for alternative funding. There are different ways to acquire fund and one of them is called “accounts received factoring”. This method has roots that link back to England’s 13th century during early times of modern banking industry. Internationally, this method has become a widely practiced method, although it has made its way to mainstream financing industry in some countries. Obviously, the accounts received factoring or ARF is still a type of loan. However, there are advantages that businesses won’t have their credit checked and their assets evaluated. It may be quite confusing, but businesses get money that will be theirs. In essence, companies sell its account receivables of invoices to factoring companies. This will allow companies to obtain the anticipated revenue from clients. There are a variety of waiting periods, from two weeks to three months. So, it will be the factoring companies that are waiting to be reimbursed indirectly by the debtors’ clients.

For many companies, it is important for them to receive cash upfront; instead of waiting for one month or more. Due to specific circumstances, they can be short on money and need to pay salaries and bills. They also need to take any into consideration any financial surprises that can pop up and they usually do. Just missing one payment from a difficult client can set their business spiralling into a slow death. Having to borrow money with high interest rates, backed with collateral assets can be a truly difficult situation. Owners don’t always have enough cash to fund their businesses until their invoices are paid. As an example, a windows washing company could have $20,000 dollars in contracts and the money will be paid 90 days after the job is completed. The company has 5 trucks that cost $1,200 each month and 4 employees who are paid $6,000 in total per month. Combined with costs for other loans, supplies, materials, advertising, letter head and maintenance, this could leave a profit of less than $5,000. This situation can look quite bad if the business owner needs to pay for these expenses from their personal funds. Low-income, but experienced employees could stay motivated only if they are paid on time. Late payments could cause productivity problems and they may quit the job. Business owners also need to consider their personal expenses like credit card, mortgage, gas, children education and utilities. They need to be paid immediately to avoid further problems.

This is where factoring companies step in and they charge a percentage of the invoice value, from 2 percent to 5 percent depending on the duration of waiting time and other factors. This means that the owner’s credit history has less significance, compared to when applying for normal loans.