Invoice factoring: Is it right for your company?

US-PDGov

By Floyd Davis

This article is going to show how a business can basically wash its hands of the messy and costly task of managing accounts receivable. For large businesses, the accounts receivable (AR) department is a large unit of the company employing teams of accountants and clerical workers. They work to keep straight all that has to do with invoicing the clients and keeping track of the payments they make.  They may even run a call center, manage the customer service portion of the company's website, and otherwise provide customer service to vendors who owe money.

This guide will show why this entire AR department can be outsourced, and how this will result in faster cash inflow for the business. If there had to be a one sentence summary of what  invoice factoring is, it would be:

Outsource your accounts receivable to a third party company who will pay you a portion to up front for the invoices for a fee.

Invoice factoring as a way to raise capital for business expansion is not a new business technique, but it's often overlooked. Now, with credit more difficult to obtain, small businesses are investigating invoice factoring as a way to quickly and easily raise cash for working capital requirements.

Approval for bank loans for small businesses is difficult to come by, as loan requirements get stiffer and stiffer in the post- credit crisis world. Bank loans also require application fees, lengthy application procedures, and lots of paperwork and preparation. And don't forget the interest on a bank loan.

Invoice factoring is better than a loan

Invoice factoring compares favorably to a small business loan from a bank in all these aspects, which is why it's a fast-growing segment of the business world.

Incurring debt with a small business loan is not always a sound option. There's risk involved with any type of loan. Unfortunately, it's just how business is done if expansion is in the works.  Few small businesses have extra cash on hand for major improvements or expansion. Taking on a loan is common.

Invoice factoring, on the other hand, involves no long term commitment, no chance of defaulting since it's not a loan, and no up front fees commonly associated with a bank loan. The business simply sells its invoices, receives cash for them, and the transaction is finished. The downside is that only a percentage of each total invoice is received. The rest goes to the invoice factoring company, which is the only fee the business pays. Having cash on hand quickly and removing the uncertainty of unpaid accounts receivable are the rewards of working with an invoice factoring company.

Freight bill funding

If you are a transportation company with a cash flow problem then freight bill funding might be of interest. It's jut like invoice factoring but it's for the transportation industry. One big difference is that with freight bill funding, clients can receive their funding in the form of a fuel card.  The fuel cards can then be used by the truckers in the company like ATM cards.

Fuel cards are accepted all over the country at thousands of locations, just like ATM cards. Fuel is a company expense, so having truckers use the fuel cards which are funded by freight bill funding is very convenient for the transportation company that uses the service. Trucking companies need constant cash flow because of their fuel charges, so using the Fuel Cards puts cash in the hands of the people who need it.

Floyd Davis is a blogger for the finance industry and more of his articles can be seen at irsrefund.biz