Utilization of the Time-Value of Accounts Receivable

In order to take advantage of the time value of accounts receivable when a company is having cash flow difficulties, one must know that a smaller amount of money today is worth more than the full amount tomorrow. This is particularly true when accounts payable are due. It is also true when a company can leverage the money to pay suppliers who offer early-pay incentives such as a percentage of discount when the amount is paid before it is actually due.

Some companies having cash flow difficulties offer early-pay incentives in order to stimulate cash flow. The problem with early-pay incentives is it is only an incentive and not always something a company can count on for sure. Wouldn’t it be wonderful to be able to squeeze out money from accounts receivable before the end of the thirty-day cycle?

Invoice factoring is a way of doing just that. A factor usually advances about eighty-percent of an invoice within twenty-four to forty-eight hours from when a company submits an invoice. The factor becomes the creditor to the business clients and pays the reserve minus a discount once the invoice has been paid. It is similar to the way a business gets paid for credit card invoices.

While factoring is more expensive than conventional bank loans, it also has certain advantages. The business is not limited to a certain amount as per a loan. The amount available through factoring automatically grows as the business grows. Thus, there is no need to apply for a larger line of credit.

Also, factoring does not adversely effect the balance sheet. Factoring is the sale of an invoice rather than a loan. Also, a factor is only interested in securing the amount factored by being in a first collateral position only over the accounts receivable. If the company has conventional loans, it is often possible to get the loan institution to subordinate to the factor allowing the factor to be in the first collateral position .

Factoring, accounts receivable funding, receivables-based financing and invoice factoring are terms used synonymously. Factoring is an alternative source of financing. Thus, it should be considered time-sensitive and transitional. Factoring should only be used until being able to qualify for conventional sources of finance.

Factoring is one of the oldest forms of financing. It has been a source in one form or another for more than 4,000 years. Credit card financing is a involved in the basic principals of factoring. One of the differences is factoring is only done business to business or business to government. Another difference is credit card companies pay the business in one installment whereas a factor pays in two installments.

In some cases, companies can benefit from factoring even though they don’t have the best of credit. When underwriting factoring, the factor focuses on the creditworthiness of the company’s clients rather than the company’s credit history. Through analyzing the company’s aging accounts receivable and accounts payable, underwriters can usually determine if factoring a viable source of financing positive cash flow.

When a company owes back taxes, it is also possible to factor invoices. In that case, there can be a lien subordination with the Internal Revenue Service. In some cases, factors will work with a company even when considering bankruptcy. However, only a Chapter 11 is considered for financing by factors.

It is possible to factor outstanding invoices on the initial funding. Thereafter, only new invoices are eligible for an advance. Normally, the initial funding takes about ten business days. The discount fee is dependent upon the amount of volume and risk determined by underwriters. However, this is an amount agreed upon in a written agreement before a company decides whether to factor or not. After the initial funding, an advance is paid within twenty-four to forty-eight hours from when an invoice is submitted.

Another way of funding companies doing a lot of credit card transactions is through loans based on the amount of credit card transactions the previous six months. Payment of the loan is based on a percentage of future credit card transactions. That allows the business flexibility by not requiring a set amount but rather a floating amount based on future volume. Thus, if the company has a slow week, it will pay less that week. Conversely, when the company has a larger volume of credit card invoices, it will pay more. But the percentage stays the same. Again, this is agreed upon before the funding takes place.

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accounts receivable, factoring, financing,