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Understanding Accounts Receivable Factoring

One of the challenges of working with large commercial clients is that they often demand trade credit as a condition of doing business with your company. This gives them the ability to pay your invoices in 30 to 60 days. While this can be great for your clients, it can wreak havoc with your cash flow. Especially if your company is growing and is not well capitalized.

Because of this, offer credit terms to your clients can be a double edged sword. It can help you grow your business by securing profitable corporate accounts. But it can also create cash flow problems and leave you without funds to pay important bills from suppliers.

One way to solve this problem is to finance your accounts receivable.

Who can benefit from receivables financing?

Financing your invoices can benefit your company if your biggest financial problem is that your customers are taking up to 60 days to pay, and you need the money sooner. It works well with companies that:

  • Work with credit worthy commercial clients
  • Offer up to 60 day payment terms
  • Are growing quickly
  • Need money to pay suppliers and employees

Advantages

Factoring receivables has a number of advantages, especially for small businesses. You will be able to offer payment terms to your clients without sacrificing your cash flow. This is important because it will help you grow while also providing stability.

The line can support growing sales. It’s designed to increase as your sales to qualified customers grow. Getting an increase is relatively easy and can be obtain without substantial underwriting.

Lastly, the solution is easy to get and can be deployed quickly. This makes it a a perfect option for companies that have working capital issues and need immediate financing.

How is a transaction structured?

Receivables are often financed in two payments, called the advance and the rebate. The advance is provided as soon as the product or service is delivered to your client. It’s usually a percentage of the invoice and averages 80% of the gross value.

The remaining 20% is held as a reserve to cover potential under payments. However, it’s rebated as soon as your client pays the receivable in full. The financing fee is often discounted from the rebate. You can learn more by reading “How does factoring work?

Qualification criteria

One important advantage of financing receivables is that it can be used by companies that have little collateral, aside form their invoices. Obviously, your clients will need to be financially stable since their creditworthiness serves as collateral for the transaction. Aside from that, your receivables should not be pledged as security to a finance company, and your company should not have serious legal or tax issues.

Most companies that have solid clients and good billing practices should be able to qualify.

Time frames

The initial funding for your invoices can be done relatively quickly, usually in 5 to 10 business days. Subsequent funding for approved clients usually takes between one and two business days.

Get more information

Are you looking for a receivables factoring quote? We are a leading Canadian factoring company and can provide you with high advances at low rates. For information, get an online quote or call (877) 300 3258.

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