If you are in a business that has to offer credit terms to customers, you will find out with time that your cash flow will eventually dwindle from Cash on Hand to Receivables on Paper. For many business owners, this has been a serious stumbling point in their business cycle. Many of them have never heard of Receivable Financing. It is so simple and widely used by many industries, yet still to date it remains an unknown method of financing to CEO’s, banks and business owners.
What business owners do not realize is that accounts receivable is an asset that can be pledged as collateral to a factoring company. A factoring company specializes in advancing funds utilizing your receivables, monitoring credit of your customers, also referred to as the “Account Debtors”. Your business can establish a revolving line of credit using this accounts receivable financing.
Every invoice is an individual transaction and is treated as such during the cycle of the funding. Each account debtor is established with a credit limit based on the credit worthiness. Each invoice is advanced with a certain percentage, this is referred to as the “Advance Rate” and usually varies by industry, concentration or risk determined by the factoring company. Typical advance rates may vary from as low as 60% up to 90%.
The remaining balance is withheld as a reserve amount to compensate for any loss, dilution, chargebacks or any kind of offset an invoice may incur. Once the factoring company is paid in full for the invoice amount, it is closed and a discount fee is taken out of the reserve amount. The remaining balance or the reserve is available to withdraw.
For example, if your business has 100 invoices at $1000.00 each, you would have $100,000 in accounts receivable, assuming all clients are eligible and you had an 85% advance. Your available cash flow would be $85,000, or $850.00 for each invoice. A discount fee would be applied and the remaining balance would be deposited in your cash account as each invoice is paid. Typical fees may vary from 0.5% to 6% depending on how long the invoice remains outstanding, volume, invoice size or industry.
There is no interest rate because this type of financing is structured as a buyer seller agreement, and your balance sheet will not show debt rather cash on hand and no a/r. Every factoring company is unique and may vary in underwriting, credit decisions, risk appetite, industry specialization and size. The main thing is to make sure that the factoring company you choose understands your industry and the way you invoice to make sure you have a good fit.
It is very important that you always sell to credit worthy customers, monitor your credit with existing clients and diminish risk by keeping on track using business credit reporting companies . Accounts receivable financing is leveraged more on the accounts your business sells to, not much on your balance sheet or financial status.
1st Commercial Credit has a vested interest in funding partners, affiliates and correspondent lenders throughout the world, with access to over $2.5 billion dollars in working capital.
We attract clients that:
1st Commercial Credit, LLC provides export trade financing to clients in every major world market and can convert accounts receivable finance transactions in 17 currencies.
Thank you your interest in 1st Commercial Credit
Raul Esqueda, President
1st Commercial Credit, LLC