Before we begin discussing how accounts receivable can best help small-to-medium-sized businesses access more working capital, it is important to discuss how accounts receivable factoring works.
Picture this: John Doe owns a small business in the New York City area that specializes in transporting large items. Since the inception of his company a year prior, John has built a large book of clients. As John’s business starts to see some success, he finds a unique opportunity for growth — but that will require him to purchase new vehicles and hire more employees.
Sadly, John does not have the working capital to make that possible, and because his business is still relatively new, his line of credit will not be able to cover his needs. To make it even worse, the revenue that he is currently generating is more than enough to help fund his business growth — with the only issue being that he offers extended payment terms of 60 or 90 days to his clients.
This is where accounts receivable factoring comes in. Once John realized that he needed help, he got in touch with a local capital group to discuss his options. One of the first options pitched to him was accounts receivable factoring.
By partnering with a capital group, John could have his invoices bought — giving him the capital that he needs when he needs it.
Accounts receivable factoring, in its simplest definition, is when a factoring company buys your invoices before the client pays you back. After paying you the amount owed by the customer, the factoring company will own the invoice and thus be responsible for collecting the debt.
So what are the 4 reasons that your small-to-medium sized business should consider accounts receivable factoring?