Accounts Receivables Financing: A Profit making Financing Alternative!

1. Accounts Receivables Financing: A Profit making Financing Alternative!

2. Accounts receivable financing, in other words known as ‘factoring’ can be rightly defined as an asset financing arrangement where the receivables are largely used as collateral. This in turn serves as a method where the company can free up or leverage the capital which is otherwise stuck in receivables or useless paper! By selling or factoring the receivables, the risk associated with it also gets transferred thereby reducing the company’s burden and enabling it to focus on profit making activities. Account receivable financing can be of great help to companies as it can provide for the additional funding your company requires.

3. Every business requiresconsistent cash flow to support its various needs. Whenever there is a seasonal demand or a sudden short term cash need, it will call for immediate flexible cash for different purposes like buying more inventory or payroll payment. Here is exactly where factoring comes to help. It gives your business the opportunity to access cash,sparing the need for potentially selling equity in your company. Compared to equity, research shows that lending is a lot less costly than selling a portion of your company and the permanent cash flow loss that forever goes along with that sale.

4. Accounts receivable financing process can be much more beneficial to your business in ways besides just money as it can create more valuable time, thus letting you provide better customer service and generating new business. This type of financing can, to a large extent reduce the payment turnaround time thereby ensuring better cash flow for your company. Yet another advantage is the reduced interest expense. Besides, you can also decide the cash inflow and outflow of the funding as and when the situation demands is deemed the best for your business.

5. The question whether every business requires accounts receivable financing is highly debatable. The requirement of factoring or accounts receivable financing differs from company to company. It mainly depends on the size of the company and its various requirements. For instance, in many logistics companies and importing firms, the amount of receivable would be large enough but factoring process would not work out successfully. This is because their margins are very small in these industries. Similarly if the gross margin of a company is below 12 %, it needs to analyze and recheck its accounts receivable financing companies activities.

6. If we go by the general conventions, a business needs to have at least above 25% gross margins to easily use account receivable financing as a financing tool. Each company has its own working capital needs and what it requires is a customized accounts receivables’ financing option obtained only after a thorough analysis of its requirements. For a customized plan, 1st PMF Bancorp would be happy to provide more information. Feel free to contact us at www.PMFbancorp.com