Receivable Factoring – The Key to a Healthy Cash Flow

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Author: Ray Smith

Article source: http://www.articlealley.com/. Used with author's permission.

Availability of sufficient working capital and maintaining a healthy cash flow is probably the biggest challenge for most businesses. While some businesses would opt for small business loans to meet their working capital needs, the best option is to go for receivables factoring, which will give you the much-needed working capital as well as maintain a proper cash flow. Why go for a loan when you can use your own receivables to get the necessary cash?

With receivables factoring you sell your receivable invoices to get cash. The firms that buy your receivables would pay you the cash immediately and later collect the fund from your debtors. One of the main reasons for cash flow problem is that the total amount of receivables becomes very high and the availability of cash becomes low. Receivables factoring is used by businesses all over the world to maintain their cash flow.

There are certain common problems and issues in most business that gives rise to the need for funds. These would include:

• Long billing cycles resulting in impaired cash flow cycle


• Large amount of debtors turning into bad debts


• Considerable amount of time and resource being spend on Collections which could have been used for business growth


• Your business wants to offer credit and flexible terms to large buyers to increase sales


• You apply for a Working Capital Loan and that is denied by the bank

All this issues can be effectively resolved by factoring your invoices and receivables.

Immediate availability of cash
Receivable factoring offers a number of benefits to any business. One of the main benefits is the immediate availability of cash, helping you to avoid the risk of getting into debt to maintain the daily operations of your business.

Maintain smooth cash flow
Receivable factoring helps to maintain a smooth cash flow. Most business would have to typically wait for 30, 60 or 90 days to realize their receivable invoices and this results in long billing cycles. Also, there is always a factor of uncertainty about the time of payment. Receivable factoring helps you to accurately predict the time of receiving the payments based on your terms with the receivables factoring company. Also it expedites the realization of those receivables.

Reduces expenditure on collections
Receivable factoring also relieves you form the gruesome task of collection; you don't need to run after your debtors for collecting your receivables. Most receivable factoring companies have specialized people for collection and can track the debtors to realize the payments for their invoice.

Reduces bad debts
Once you factor your receivables with a factoring company it not only reduces your headache for collecting the money but also reduces your bad debts considerably. Your factoring company pays you for all your invoices and it is their duty to get the money from the debtors.

While receivable factoring comes with so many benefits, you should not jump into it without taking a detailed look into the financial condition of your business. If you are running on low profit margin factoring invoices is never a good thing to do, because all factoring companies would keep a cut from your invoice value there by reducing the margin even more. Also if you are able to maintain a steady cash flow and have enough working capital to run the daily operation, you would not be required to go for factoring your receivables.