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Factoring and Accounts Receivable Financing – A Real Working Capital solution for Cash Flow challenges

Guest post by: Stan Prokop

Article Overview: Factoring receivables – Alternative financing with a price ;Information on how you can eliminate cash flow gaps and liquidity challenges through an effective accounts receivable financing strategy . Discussion of some downside issues in factoring funding .

Factoring and Accounts Receivable Financing – A Real Working Capital solution for Cash Flow challenges

Factoring is predominantly becoming the main solution when a firm considers a new or alternative accounts receivable financing strategy. As customer payments slow down ( many firms seem to be waiting 60 to sometimes 120 days for the customer payments ) the challenge of running your business from a cash flow perspective increases . The irony is of course that many customers still post 30 day terms on their invoices and purchase order acknowledgements from their client base.

We should not fail to mention of course that there is one very obvious 'non - financial 'solution for your company, and it does not even involve additional financing effort. It is simply to enforce collections more strongly and reduce what is known as your 'day's sales outstanding 'to a more manageable level. Any major dent you can put in your 'D S O 'will improve working capital and cash flow. There is of course the other non financial alternative, which is the other side of the equation, and that's to slow payables, which also improves cash flow - but you don't want to do that at the expense of your suppliers which you value.

So we have discussed why you want to factor receivables and to some extent what your non - financial solutions are.

But let's just make sure we understand what we are talking about. When you are working under a bank facility your receivables are collateralized or pledged as a security for an overdraft. That's the best simple way we have of explaining to clients what factoring is not. What is is , though, is the sale of your invoices , on a daily, weekly, or monthly basis ( the flexibility is your choice ) , thereby increasing your advance rates on those receivables to the 80-90% range depending on the type of facility you have structured .

More cash flow and more immediate cash flow is the most obvious solution to factoring and accounts receivable financing. There are two sides of the coin though, and on the other side of this type of financing strategy is the fact that you might find yourself reporting on your receivables more often that you would have with a bank type revolver line of credit. You also might be less reluctant to negotiate longer payment terms for your customers, as in fact it will as your firm that directly carries this financial cost.

We spoke of the price you have to pay in factoring receivables. When we site down with clients we advise them there is a real price, i.e. the financing or invoice discounting cost, but, more apparently, the major change in the way day to day business changes from a paper flow and customer interaction basis. If you negotiate the wrong type of facility you might find yourself in the same situation that many of our clients have found when they come to us with financing woes, which is simply that they feel that in spite of the significant cash improvement they in fact feel that their factor firm partner is running their business.

Factoring facilities in Canada are available with firms who have very high professional standards, are well funded to meet all your financing needs, and in fact tailor their financing service to your business, once they understand the uniqueness of your challenges.

Many business owners who know little about factoring seem to know one thing, that it can be viewed as intrusive by their customers. You can eliminate that 'intrusiveness 'by ensuring you have the right type of facility, one that is priced right, has straightforward terms, and works on a day to day basis for you and your customers. The best factor funding facility in fact, we feel, is the one that allows you to bill and collect your own receivables, while at the same time reaping all the benefits of accounts receivable discount, as factoring funding is also known.

So what's our bottom line in our cash flow information interchange - it simply:

-Determine if you can achieve self financing status via the more prompt collection of receivables

-If financing is in fact needed consider factoring financing as a working capital strategy

And , most important, work with a credible , trusted and experience advisor who will model a working capital and cash flow solution that reaps benefits and cash on terms you can live with on a day to day basis .

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Article Tags: accounts receivable funding, factoring, factoring receivables



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