Factoring Companies- An ideal option to seek capital on your receivables

Many companies are faced with the problem of cash flows in their day to day business process.  It is very essential that, before you consider financing your account receivables, you need to get to know all about Accounts Receivable Financing, (ARF) also known as Factoring. The basic principle behind the AR financing is that, you are extended a loan amount at a premium from an accounts receivable lender (otherwise known as the factor) holding your AR as the collateral.

This kind of financing facilitates organizations to access the needed money well in advance of realizing the payment on receivables. Once the company has got the capital from the financing institution, the risk involved in the receivables is now transferred to the financing institution and the capital receiving company is charged a premium. Business firms showing good collection rates, more accounts receivable, and credit history will be extended AR financing with attractive terms. On the other hand, if the company is poor performing and complicated AR, such company will not be able to get Accounts Receivable Financing with flexible terms.

It is a common practice that many of the factoring companies will hold back and will offer only   15-25% of your ARs as a precaution to lessen the risk of collection. The factor company will keep this, until the complete AR's factored are realized.  But for many firms this 15-25% ARs decides the profit of the company.  As a result, you will be compelled to factor your entire ARs to get the required financial cushion to run the business and this process continues as a vicious circle.

Before approaching factoring companies, you need to decide which one of the following conditions is apt for you:

•My company is running in a profitable and stable manner. I am considering using the money received through my ARs for the planned growth of my company.

•My firm is seeing profit only recently. I am in need of quick capital because my company is seeing temporary setback in business. This immediate dose of capital will permit me to enhance my profit.

•My company is in bad shape and its future is not certain. I am seeking capital for meeting various needs like employee salary, buying raw material, marketing expenses etc.

If your company is not falling under the first group, then factoring may be a risky proposition, if not highly risky, for your firm. Prior to approaching a factor, you need to interact with the present customers and try to extend discounts for early payment for your receivables. If your condition fits category 3 above, it may also be a high time for you to think of a merger.  It is better to own a small share of a bigger and profitable organization is ideal option than to own the entire lot of a loss incurring company.