When you first learn of accounts receivable factoring, you begin to wonder why it isn’t utilized by nearly every small business on the planet. This type of small business funding was created for several cash flow scenarios that are basically inevitable for any business with growth on the horizon. And yet you probably haven’t heard of a single company using accounts receivable factoring. But then again, something you probably HAVE heard of is a business failing despite a healthy number of clients. These two notions are most certainly related.
Those who are unfamiliar with accounts receivable factoring are likely unaware of how it differs from a traditional small business loan as well as why the need for it would arise in the first place. Answering both questions will show you why this tool will soon become as common for small businesses as social media marketing or project management software.
Here are 5 things you need to know about accounts receivable factoring:
1. This Is Not a Loan!
A small business loan shows up as “debt” on your balance sheet; accounts receivable factoring does not.
Yes, accounts receivable factoring is sometimes referred to as an “accounts receivable loan” but it’s very different from credit card factoring, or merchant cash advance. With accounts receivable factoring, you receive an amount based on a certain amount of existing receivables, whereas with a merchant cash advance, your amount would be based on all future credit card receivables. The former option involves your accounts receivable lender collecting the majority of the payment from your customer, and the latter is the opposite, or your lender collecting a percentage of future credit card sales.
Your lender is essentially purchasing your company’s receivables, so instead of making payments on your own, your customers are paying back the lender simply by fulfilling their obligations.
2. You Can’t Just “Make” Customers Pay On Time
Accounts receivable factoring exists because many industries, from healthcare to retail, must sometimes wait up to approximately 120 days for a full payment to come in. Bloggers often recommend that companies make it a priority to establish payment terms with customers early on or somehow “force” them to pay up front (how are they supposed to do that?), but, like any business strategy, this is easier said than done. For medical practices, the payment process is so complicated that the average practice reportedly fails to collect 25% of the total amount owed for treating a patient.
Other industries compete for large accounts, and the larger the account is, the longer you will have to wait for payment. Some borrowers use accounts receivable factoring primarily to land that game-changing account during a slow period when competitors are anxiously waiting for cash flow to balance out.
3. Your Customers Will Have No Reason to Panic
Most factoring companies notify your patients or customers when they take over your receivables. This has created a “stigma” that suggests these customers will think twice about doing business with you once they learn someone else is collecting their payments. But if you choose United Capital Source as your accounts receivable lender, your customers will not be notified that you sold their invoice. In fact, they usually won’t have to do anything differently because whether you are switching from another factoring company to UCS or using factoring for the first time, the process of setting up the new payment system is virtually seamless.
It requires even less paperwork than traditional small business loans, which can be approved in just 24-48 hours. We can also help you determine which accounts to factor against and whether you should receive all of your funding up front or over the course of several months. If anything, your customers should be delighted to learn that you sought accounts receivable factoring because it means you now have the ability to make more purchases at a faster rate and offer betters as an incentive.
4. Maybe All You Need Is Time
Imagine not having to wait to hire that extra salesperson, prepare that marketing campaign, secure inventory when it’s available for a discount, or pay your suppliers up front. Accounts receivable loans allow you to stay on schedule and ultimately save money by removing the burden of waiting for customers to pay up and constantly reminding them to do so. Taking care of business expenses on time is a priceless investment because companies with reliable reputations almost always receive the best quotes from partners and the longer you wait to collect a payment, the more operational funding you have to spend to cover the gap each month, which diminishes your profit margin.
5. The Pricelessness of Predictability
Some businesses with accounts receivables might have looked at the previous paragraph and went “Stay on schedule? What’s that like?” Accounts receivable factoring grants you the luxury of predictability, something that has remained out of reach for countless businesses. In exchange for a minute portion of income, you gain the means to cover regular or unplanned expenses (broken equipment, sales on inventory, someone leaving the company), no matter what. The amount of cash you have on hand for operational expenses and grow your business does not go through any major changes. In other words, you can plan out other investments for any time of the year, and United Capital Source can show you how!
Remember, accounts receivable factoring is not categorized as “debt,” which can make you seem more qualified to embark on other forms of financing in the immediate future. At UCS, our number one concern is forming long-term relationships with our clients, and this can only be done if we offer you the very best factoring program on the market. Let this be your starting point for multiple rounds of funding with terms that evolve just like your business!