Though business invoice factoring or accounts receivable factoring has been around for hundreds of years, it is new to a lot of businesses and therefore may bring about confusion, particularly regarding how it will affect your finances. As a business decision maker, you care not alone in having this concern. So let’s take a closer look at how factoring receivables will affect your books.
When you set out to secure money for your business, you are probably thinking that you’ll have to get a term loan from your bank because this is what’s most familiar. Yet there are other options. With factoring services, you sell your existing accounts receivables or invoices to the third-party factoring company, which then provides you with cash (the value of those receivables) right away. The company then collects on your invoices within the 30- or 60-day time period, and then you pay a fee or percentage for the processing.
Invoice Factoring Will Not Appear on Your Balance Sheet
Because factoring accounts receivables is not a loan, there’s no indication of this transaction on your balance sheet since it is not classified as a liability. Keep in mind that you are selling your existing invoices (i.e. current sales & outstanding invoices) rather than betting on any future sales or revenue. Moreover, when you are factoring receivables, you are not taking on any new debt so there’s no worry about how the transaction will affect your credit. In other words, there’s no paying anything back within a certain time period because the transaction is already complete. The invoice factoring company will even handle the collections efforts on your behalf, as stipulated in the terms of the contract.
Creditworthiness and Account Receivables Factoring: What to Know
The prospect of securing a cash infusion without taking on additional debt appeals to many business owners, and it is no secret that this is a reason why a number of companies opt for account receivables factoring.
Yet other companies choose receivable factoring because it is not dependent on their credit score. Whether your credit is less than perfect or maybe you are a new business and have yet to establish a significant line of credit, you can still take advantage of account receivable factoring if your clients are established with solid lines of credit themselves. That is, factoring companies look at the creditworthiness of your clients rather than you so you don’t have to worry about a number on a FICO score.
So whether you are looking for a new way to shore up your cash flow or boost your working capital without increasing your debt by taking out a bank loan, factoring accounts receivable is an option you should consider.