Accounts Receivable Factoring
Accounts Receivable Financing is the selling or pledging of a company's
account receivable, at a discount, to a Factor, a Commercial Finance Company
or to an Accounts Receivable Financing Company who then assumes a risk
of loss. The terms “Factor, Commercial Finance Company, and Account
Receivable Financing Company”- all describe businesses that advance you cash
in return for earning a fee when your accounts receivable are paid. You
receive a portion, usually 80% to 90% of the face value of your receivables in
advance of payment from your customers in return for a fee, or interest, to be
paid to the commercial finance company. When the commercial finance company is
paid by the customer, the appropriate fees are deducted and the remainder is
rebated to you. “Accounts receivable financing” is also called accounts
receivable factoring, factoring financial services, invoice factoring and cash
flow factoring. The terms are used to convey the same meaning.
An account
receivable is money which is owed to your company by a customer for products
and services provided on credit. This is treated as a current asset on a
balance sheet. A specific sale is treated as an account receivable after the
customer is sent an invoice. A business has an account receivable after
billing their customer for products or services that have been actually
delivered according to mutual agreement. Commercial Finance Companies are paid
for factoring financial services when the accounts receivable are paid by your
customers.
Cash
Flow Factoring
Cash
flow factoring is accounts receivable financing that is transparent to your
customer. A commercial finance company provides you credit based on your
accounts receivable without directly notifying your customer. Cash flow
factoring is also known as non-notification factoring.
Asset
Based Lending
Asset based lending or asset
based financing refers generically to commercial finance transactions i.e.
loans secured by a wide variety of assets. Businesses can obtain asset based
lending by using the liquid, current assets of the company (such as accounts
receivable and/or inventory) or the fixed assets of a business (such as plant,
real estate, and equipment) as collateral.
Asset based financing relies
on the value of the underlying collateral to minimize the loan's credit risk.
Commercial finance is the term most commonly affiliated with the industry
group of asset based lenders that provides all types of asset based loans to
business and commercial borrowers. Asset based lenders are sometimes referred
to as secured lenders. Asset Based Lending is generally less costly than
Accounts Receivable Financing and transparent to a company’s customers.
Purchase
Order Financing
Purchase Order financing is
the assignment of purchase orders to a third party, a commercial finance
company, who then assumes the obligation of billing and collecting. Usually,
this type of financing is related to transactions where your company requires
more cash flow to be able to pay for the manufacture of the goods for which
you have received a purchase order. The Purchase Order Company may assume both
the production risk and the collection risk.
Purchase order financing can
be used to finance all current and subsequent orders to improve a company’s
cash flow. The process works as follows: 1) Your company obtains a purchase
order for products to be sold another company; 2) A letter of credit may
be issued, based on a finance companies’ credit, to guarantee payment
to suppliers or factories producing the goods; 3) The order is shipped,
delivered and accepted by your customer; 4) The customer receives an invoice
for the goods; 5) The Purchase Order Company pays the supplier/factory; 6) a
commercial finance company or Accounts Receivable Finance Company pays the
Purchase Order Financing Company after the products are delivered to your
customer; 7) The customer pays the commercial finance company for goods
received; 8) The accounts are settled and the profit is paid to you.
Inventory
Financing
Inventory financing is a loan
secured by the inventory of a business. Inventory finance enables distributors
and dealers in a broad range of industries to hold more stock without cash
flow strain and to generate more sales. Inventory financing is available to
distributors and dealers in a broad range of sectors such as industrial,
construction, computer, office, telecommunications, agricultural /
viticulture, motorcycle, road transport, airline and marine industries.
Inventory finance is often part of an Accounts Receivable Financing commercial
finance package.
Letter
of Credit
A
Letter of Credit is a binding document that guarantees payment for goods to
the seller. Basically, a letter of credit gives the seller reassurance that he
will receive the payment for the goods. In order for the payment to occur, the
seller has to present the bank with the necessary shipping documents
confirming the delivery of goods within a given time frame. It is often used
in international trade to eliminate risks such as unfamiliarity with the
foreign country, customs, or political instability. It is typically a
component of Purchase Order Financing and Accounts Receivable
Financing. A Letter of Credit for small business finance is often issued by a
bank, based on the creditworthiness of the commercial finance company that is
funding small business loans to improve cash flow in a commercial finance
transaction.
SBA
Loan
Small
Business Administration Loans are business loans originated by Banks and
Commercial Finance Companies- a portion of which is guaranteed by the U.S.
government. Many businesses are eligible for SBA financing. SBA loans are
government guaranteed loan programs. The SBA 7(a) program offers long term
financing for purchasing a business, buying out a partner, equipment
financing, working capital, debt refinancing, real estate purchase,
construction and improvements. This program may be combined with Accounts
Receivable Financing and Inventory Financing to acquire or refinance a
business with a working capital line of credit. SBA programs are also
available to purchase owner-occupied commercial real estate.