Guide to Factoring of Accounts Receivables

Cash flow plays a significant role in a business's running and success. Businesses with long waiting periods of weeks or even months with outstanding invoices can experience a strain on their financial resources, which can limit the business's running and expansion efforts.

Accounts receivable factoring can help such businesses free up their cash without taking on additional debt or waiting any longer for the invoice to be cleared.

What is Accounts Receivable Factoring?

Accounts receivables factoring is a financing method where a business or company sells its invoices to a third-party financial institution at a discount in exchange for immediate cash.

The factor collects payments from customers, and the company receives funding without waiting for payment from the customers.

You can receive up to 80% of the value of the outstanding invoices from the invoice finance company. The discounted rate at which you can sell the invoices varies depending on several factors, such as the customer's creditworthiness, collection history, due date, and invoice amount.

Why Accounts Receivables Factoring is Important for Businesses?

Cash flow is a huge concern and one of the leading reasons for businesses failing in Australia. For success and growth, the business must maintain enough working capital.

Unfortunately, businesses have to rely on customers to make payments on time. This is not always the case. Customers may often pay late, which becomes a problem for the business because it has to keep up with its financial obligations as well.

With accounts receivable factoring, a business can solve its cash flow problems without pressuring its clients to clear the invoice on time.

How Accounts Receivable Factoring Works

The accounts receivable factoring process is slightly different depending on the factoring company you choose. Each company will have different requirements, fees and advance payment terms for your business.

At Key Factors, we keep the process simple, effective and fast so you can get the money you need quickly.

All you have to do is deliver an order or service to the client and raise an invoice for the amount due. Typically, the client gets 30 days to pay the invoice and sometimes longer.

Once you invoice your client, send us a copy. Within a few hours, we will factor your invoice and advance up to 80% of the invoice value minus our fee. We will send you the balance once we receive payment for the invoice.

Benefits of Accounts Receivable Factoring

Businesses can benefit from accounts receivable factoring in various ways:

Improved Cash Flow from Slow-paying Clients

Managing a good cash flow is vital, especially for small businesses. Account receivable factoring allows businesses to regulate their cash flow efficiently. Instead of waiting for clients to pay their invoices, which can sometimes take weeks or months, factoring accelerates the process. It helps them access cash promptly and prevent cash flow bottlenecks that may hamper their operations.

Immediate Access to Cash

One of the most compelling benefits for businesses using accounts receivable factoring is the immediate access to cash.

Businesses often find themselves in situations where their working capital is tied up in unpaid invoices. In such scenarios, factoring provides an efficient way to transform accounts receivables into cash.

By transferring their unpaid invoices to a factoring firm, businesses can obtain the funds they need to cover their day-to-day expenses and seize new business opportunities.

Debt-free Financing

Accounts receivable factoring is not a loan. It's the sale of an asset. This distinction makes a huge difference because the business doesn't incur additional debt when it uses the service. There are no interest payments or complex financial agreements. This way, businesses can get the financing they need without accumulating liabilities.

Enhanced Credit Facility

Account receivable factoring can also help businesses looking to secure traditional loans in the future and maintain credit flexibility. Opting to factor your accounts receivables doesn't impact the business's credit history. Still, it can help boost it by ensuring businesses have the funds to keep up with their obligations to their suppliers while ensuring they are financially flexible in case they get an asset or opportunity they would like to take advantage of.

Risk Management

You can also use accounts receivable factoring as a way for your business to mitigate risks. The only way a business can be certain a client will pay their invoice is when they pay it, even when they have a stellar credit history. Invoice factoring can help you mitigate these risks by ensuring you get a majority of the invoice value upfront as you wait for the client to clear the invoice.

Accelerated Business Growth

Not having sufficient cash flow often means your business has to overlook various lucrative contracts and expansion opportunities due to financial constraints. With accounts receivable factoring, you can solve the cash flow problem and be prepared to take advantage of any opportunities available to you.

How Much Does Accounts Receivable Factoring Cost?

The cost of accounts receivable factoring also varies depending on the factoring company you choose to work with.

Usually, the fee is a percentage of the receivables being factored. However, the percentage charged may depend on various factors, such as the time it takes to pay the invoice and the creditworthiness of your clients.

At Key Factors, we are upfront and transparent with our fees. We help you understand your total commitment before extending the facility to you, to ensure it is the right financing option for your business.

We provide rapid processing and credit checks and ensure we deposit the agreed amount into your account within a few hours.