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Accounts receivable factoring is the common business process of selling invoices for a discount in order to access immediate cash. Here are two ways in which to have a better understanding of why this business practice is picking up even more momentum for small to medium sized businesses everywhere.
About half of all Fortune 500 companies factor (sell) their invoices. What's more, roughly 75% of all Fortune 1,000 companies factor their invoices. Factoring is the process of discounting accounts receivable (A/R invoices) for immediate cash. The practice of factoring came to our country about the time that the original 13 colonies were being settled. However, this business practice has been around for many centuries prior to that. With its beginnings in ancient Phoenicia, factoring eventually made its way to Europe before landing in our country.
In our modern era, factoring has become available to small to medium sized companies over the last decade or so. Prior to that, factoring was a standard business practice only accessible for companies with more than $5 million in "monthly" sales because that volume is what banks were interested in. In the secondary financial market, funding sources have taken up where banks leave off. Therefore, it no longer matters what size a company is. If they generate invoices with other companies or the government, they can factor (sell) their invoices and grow their businesses faster!
For this reason, the factoring industry is quickly becoming the preferred route for raising capital for fast growing businesses. In fact, accountants are now recommending that their business clients "factor" as a crucial financial process to a company's growth as opposed to using this service exclusively as a business survival tool. Years ago, factoring was often used in desperate financial situations. However, a record number of fast growing businesses these days utilize factoring as a means to solve critical cash flow problems. These companies need immediate cash to expand, take advantage of discounts, meet expenses (such as payroll), purchase supplies, and, even for new acquisitions. Factoring is now the preferred way in which to improve working capital for growing companies.
The definition of receivables factoring could be as simple as saying "the purchasing of invoices at a discount." Factoring is not a loan. However, factoring is a good option in managing your cash flow.
For example, when you work with a bank in getting a loan against your accounts receivable, the bank may structure the loan based on your outstanding invoices and then they'll probably lend from 30-50 percent of the total amount (i.e. if your receivables are $100,000 the bank might loan you up to $50,000).
Factoring your invoices is better because factoring is an outright purchase and not a loan. Instead of the 30-50% that you'll get from a bank loan, you may be advanced up to 90% of those same receivables (i.e. $100,000 x 90% = $90,000) from a factor.
The reason why banks are so difficult to get loans from on your receivable is because they base their financing on the strength of the business applying for the loan (you) and not on your specific accounts receivables. A bank wants you to have a strong financial statement independent from your accounts receivable.
On the other hand, when you use a factoring arrangement, we base the purchasing of your receivables on the credit of your customers (as you do) and not on your business.
To find out if you qualify to factor all or any portion of your A/R invoices, simply print out a copy of our application and mail it to us. Just click on this hyperlink and print out the form:
Once you've completed the application please mail it to us at:
KGL Financial Group, P.O. Box 6708, Falls Church, VA 22046. Please call us with any questions that we may help you with (703) 403-3858.
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