- What is accounts
receivable financing or A/R financing?
Accounts receivable financing (also known as "factoring") is the
purchase of an invoice for delivered goods or services at a discount. A
portion of the purchased invoice is advanced to your company at the
time of
purchase, and a portion is held in reserve until the invoice is
actually
paid by your customer.
- Is accounts receivable
financing a loan ?
No. As stated above the invoice is being purchased at a
discount. It does not add debt to your balance sheet, and it does
not give up equity (ownership) in your company.
- When should I use accounts
receivable financing?
You should use accounts receivable financing when you need working
capital for your business, and you have invoices from creditworthy
customer on which you are waiting for payment and you cannot afford to
wait for payment of the invoices.
- How does accounts
receivable financing help my business?
It makes a significant percentage of the value of an invoice available
to your company
in 24 to 48 hour after an invoice for delivered good or services is
presented. This can make a huge impact on the working capital
available to a business if the payment terms of the invoice are
normally 30 days or more.
- What do you mean by
a "significant percentage"?
The "significant percentage" refers to the amount of the invoice that
is "advanced" to your company within 24 to 48 hours of presenting the
invoice for A/R financing. Since the percentage varies we are
refraining for stating it here so as to not set your expectation as to
what you are likely to receive.
- What about the part of the
invoice that is not advanced to my company?
The part of the invoice that is not advanced to your company is called
the
"reserve". A portion of
the "reserve" will be used to pay the fee
for the accounts receivable financing service. Any amount that is
not used to pay the fee for the A/R financing service will be remitted
to your company when your customer pays the invoice.
- What is the fee for
the accounts receivable financing service?
The fee for the accounts receivable financing services is called the
"discount". The discount
will vary for several reasons.
Some of these reasons are listed below.
- the length of time from
when the advance is made on the invoice until the invoice is paid by
your customer
- the industry your company
serves
- the risk perceived in the
transaction (e.g. the creditworthiness of your customer)
- the size of the
transaction (fees tend to be higher for smaller transactions)
- whether a
commitment has been made to utilize the accounts receivable financing
service for a specific length of time or transaction volume
- Are there any other fees
other than the discount?
There may be what is sometimes called a "due diligence" fee. This
fee is used to check the creditworthiness of your customer, to check if
the invoice may have been liened by your bank or another provider of
accounts receivable financing services, and to check the background of
you and your company. Also depending on the methods used, there
may also be fees for transferring the advanced funds to your company
(e.g. wire transfer fees).
- What monthly invoice
volume must my company have to use accounts receivable financing?
The minimum monthly invoice volume is about $2000 per
month. There is no upper limit.
- Would my company be better
off
using a bank loan instead?
Your company may not be
better off with a bank loan.
- if your company is less
than two years old, you may not qualify for a bank loan
- once you have a bank
loan, the bank is likely to lien your receivables as collateral for the
loan which will make it harder to utilize services like A/R financing
or purchase order funding in the future
- a bank credit line may
actually limit the growth of the company because the bank may not be
able to grow the credit line as fast as the ability of your company to
generate new
business
- the bank may decide to
call the loan if your company falls out of compliance with one or more
covenants of
the loan for any reason
- a bank loan will become
debt on your company's balance sheet which can affect the valuation of
your
company if you are considering the sale of your company
- You keep mentioning
creditworthiness of my customers. Why is that important?
When you go to a bank for a loan they look at your credit history
and your collateral. If you have a history of paying your bills
and collateral just in case you run into problem repaying the loan, the
bank will make your company a loan. With accounts receivable
financing the
collateral is the invoice and the likelihood that your customer will
pay the invoice are the critical elements. If you have sold goods
or services to a company with a poor history of paying its bills, the
value of the collateral, the invoice in this case, will be greatly
reduced. Therefore, in order for your invoices to be worth
advancing against, your customer must have a good history of paying its
bills.
- How long does it take to
setup to use the accounts receivable financing service?
The initial step is for you to complete an application and supply the
requested financial documentation. Once the application and all
the
financial documents are received, the "due diligence" process will take
about 5 to 7 business days to complete. After your account is
setup, advances against invoices can be made within 24 to 48 hours of
presentation of the invoice.
- My company cannot afford
to offer credit terms to our customers. How can A/R financing
benefit my company?
If your company is not offering credit terms now, then it is probably
turning away business from companies or government entities that will
not pay on delivery of
goods or services. A/R financing may allow your company to offer
payment terms to your customers if the advance that is paid to you
within 24 to 48 hours of invoice presentation covers your costs
of
providing the goods or services. By being able to offer payment
terms, you can greatly expand the number of companies you are able to
do business with.
- My company offers a 2% Net
10 discount to our customers. Why should I use A/R financing?
A "2% Net 10 discount" may actually be more expensive than accounts
receivable financing in terms of the effective rate. A 2% net 10
discount is equivalent to a 6% discount fee for a 30 day
transaction. Unless the monthly transaction volume is small, the
discount for a
A/R financing may actually be less.
- My company already has
a bank credit line? Can my company still use accounts receivable
financing?
Yes, but the cooperation of your bank will be required to release any
lien (UCC-1) it may have on the invoices on which accounts receivable
financing is to be used. The reason for this is that if someone
else has ownership of the invoices (in
this case, your bank), then you cannot sell them as part of an
accounts receivable financing transaction.
- If my customer fails your
creditworthiness requirement, should my company still do business with
that customer?
Who you do business with is your decision. If the customer is a
new customer, then you may want to reconsider doing business with
them. You may save yourself headaches later on. One of the
advantages in using accounts receivable financing is the information
you get about the likelihood that you will be paid by your
customers. How you use that information is up to you.
- What happens if my
customer does not pay the invoice?
If your customer does not pay the invoice, there may be
"recourse". Recourse means that your company will have to "make
good" on the invoice that was not paid. This is often done by
replacing the defaulted invoice with another invoice, but may also be
done by repayment of the advance plus the fee for accounts receivable
service. Recourse will not be required in the case where your
customer failed to pay the invoice because they became insolvent.
- When is an invoice
considered to be in default?
For commercial transactions (excluding third-party pay), an invoice is
considered to be in default if it has not been paid by 90 days after
the invoice date.
- Can I use A/R
financing if my company has not yet delivered the product or
service?
No. A/R financing
can only be used for products that have been delivered and services
that have been performed, and for which an invoice has been
presented to your customer. Your company may be able to use
purchase order funding for goods that have been ordered, but not yet
delivered. Unfortunately, purchase order funding cannot be used
for services.
- Does my customer continue
to pay my company when using the accounts receivable financing service?
No. When using the accounts receivable financing service for an
invoice you will inform your customer that their payment of the invoice
should be redirected to the company providing accounts receivable
financing to your company. In the event that they send the
payment directly to your company, then you should forward that payment
to the company providing the accounts receivable financing service to
your company.
- Some of my customers pay
their invoices near the 90-day point, while most pay more
quickly. Should I use accounts receivable financing for my
customers that pay near the 90-day point?
No. Your best strategy will usually be to use
accounts receivable financing on your invoices that pay in 30 to
45 days. This will still make working capital available to your
company, but at a lower cost than if you used accounts receivable
financing on those invoices that pay near the 90-day point.
- Can the fee for accounts
receivable financing be reduced by delaying the request for accounts
receivable financing?
Yes. Your company can usually delay requesting accounts
receivable financing for up to 30 days after the invoice date.
- My company has an
opportunity to bid on federal government contracts, but we are
concerned
about having enough working capital during the contract period.
How can your service help our company?
The federal government recognizes that its vendors may have cash flow
challenges while waiting for payment on federal contracts. To
help
mitigate this problem, the federal government passed the Assignment of Claims Act of
1986. Very simply, this act provides the framework for doing
accounts receivable financing on federal government contracts.
The federal government realizes that many vendors to the government may
experience working capital challenges while waiting for payment on
goods and services provided to government departments and
agencies. We can help you obtain the accounts receivable
financing your company needs while waiting for payment on invoices for
its government contracts.
- We are a HUB Zone
company. Can we use accounts receivable financing?
Yes. HUB (stands for Historically Underutilized Business) Zone
companies can certainly use accounts receivable financing. Using
this service will allow your to do the following.
- compete with larger companies with better cash reserves
- make working capital available from federal contracts
to pay employees and subcontractors
- perhaps eliminate the need to use an SBA-backed bank
loan
- My company is a
subcontractor on a government contract to a company that is actually
smaller than mine. Can my company use accounts receivable
financing in this situation?
Maybe. The company you are contracting under may not meet the
"creditworthiness test". However, it may be possible to provide
accounts receivable financing to the company you are working for and
pass a portion of the proceeds through to your company. These
situations need to be reviewed on a case-by-case basis to determine if
accounts receivable financing can be done.
- My company has an
indefinite delivery indefinite quantity (IDIQ) contract with the
federal government. How can accounts receivable financing help my
company's IDIQ contract?
The beauty of accounts receivable financing is that it adapts to the
peaks and valleys of your business. Accounts receivable financing costs
your company nothing until you use it. With an IDIQ contract you do not
know exactly when or how much of your product or service you will be
asked to provide. It doesn't matter. Once that product or service
is provided accounts receivable financing is ready to make available
working capital to pay employees and suppliers within 24 to 48 hours of
invoice presentation.
- My company is in
bankruptcy and is looking for financial assistance during the
bankruptcy reorganization. What can you do to help with our
financing needs?
Once a company is in bankruptcy we may be able to help with a form of
accounts receivable financing called "debtor-in-possession" (or D.I.P.)
financing. Working with the bankruptcy court and your bankruptcy
attorney, an evaluation is done to determine if the application of
accounts receivable financing will provide adequate and stable cash
flow to allow the company to operate profitably going forward. If
it can, then the company continues to operate with the assistance of
accounts receivable financing (also called D.I.P. financing)
while terms for settlement of the debt leading to the bankruptcy filing
are worked out.
If you have additional
questions, or if you would like to learn more about how we can provide
additional working capital to your business via accounts
receivable financing, please
click here to contact us, or
Call us now at 1-800-598-1178
to get started.
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