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Return To Factoring Article Archive   Stimulate Company Growth Using Accounts Receivable Factoring By Henry Byers Accounts receivable factoring is distinct from using your accounts receivable as loan collateral because you are outright selling some or all of your receivable to a factor, such as a bank or insurance company, at a discount. You dont collect the debt owed to you from that account anymore, but you also dont have to worry about loan repayments. Accounts receivable factoring makes up about a third of all financing secured by American companies using accounts receivable and inventory as collateral; its not an uncommon practice. And accounts receivable factoring can help you get large orders that you otherwise wouldnt be able to manage. Consider the following scenario: you have ten thousand dollars in cash on hand, most of which is currently earmarked for payroll or debt payment. As a relatively new company, you dont have credit enough to use your accounts receivable as collateral for a loan. A large new account becomes available, and you bid on it and win. The problem is, you only have a workforce of fifteen people, and the new contract requires you to staff it with twenty people, purchase several new computers, and find space for the new staff to work out of. And you must do this immediately. Your ten thousand dollars isnt enough to do this, and you cant get a loan. But you can engage in accounts receivable factoring, sell your current receivables at a small discount, and have the cash immediately on hand to hire the staff, rent the space, and purchase your necessary equipment. Another possibility - you have a large amount owed to you as in accounts receivable, but one company is paying much too slowly, despite the penalties for late payment. You can sell your not-past-due accounts receivable to an accounts receivable factoring agent in order to maintain your cash flow, and with penalties for late payment applied to the other company, you will probably break even. Using Accounts Receivable Factoring Wisely When you sell part of or all of an account to an accounts receivable factoring company, try to get a personal recommendation for the company from a trusted associate: another companys officer, a trusted friend, a bank, etc. If you cant, at the very least ensure your accounts receivable factoring agreement states exact conditions, charges, and procedures for the purchase of your accounts receivable. And dont use accounts receivable factoring just as a way to get ready cash. Accounts receivable factoring can help you determine whether your payment terms are overly generous, whether the companies to whom youre extending credit are credit worthy, and whether your collections arrangements are adequate for your business. When you speak to the agent arranging your accounts receivable factoring, be it a broker or the actual funder, ask about these things. Accounts receivable factoring companies are interested in long-term ongoing relationships with companies, and will be happy to help you ensure your procedures and information concerning accounts receivable are adequate for your needs. You should never use accounts receivable factoring for debts you suspect wont ever be paid. Again, you want to develop long-term relationships with accounts receivable factoring companies; they can help your company grow for a long time into the future. But if you sell them accounts they cant collect on, you can be certain they wont work with you again, and they may share that information with other accounts receivable factoring companies as well. About the Author: Henry Byers, Accounts Receivable Factoring advisor - focusing on Business Factoring and Factoring Receivables Commercial Finance

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