Do You Understand The Differences In Accounts Receivable Financing Services?

Accounts receivable financing services can vary significantly from one financing company to another.

Financing companies will attempt to differentiate themselves through the service offering that goes with the financing they provide.

Each service offering can also lead to significant difference in pricing.

The first major difference in accounts receivable financing services is the difference between margining and factoring.

Margining is typically provided by banks where the financing institution will give you an advance against a percentage of your accounts receivable. The bank does not take ownership of your accounts receivable and related financing facility functions like a line of credit, going up and down based on the amount of funds advanced and the level of accounts receivable at any period of time.

This is by far and away the cheapest form of accounts receivable financing services. Interest rates are prime based and administration costs are typically minimal.

Unfortunately, margining is only offered to companies 1) in business for over 2 years; 2) monthly accounts receivable of at least $250,000 (if a lower amount, the receivables would likely need to be insured); strong customer accounts with some track record with the borrower company.

The Most Common Financing Mechanism Utilized In Business Today Is Factoring.

Accounts receivable financing services utilizing a factoring system, actually take ownership of your accounts receivable and in turn advance you 70% to 85% of the amount owing until it is collected, at which time the remainder of the funds outstanding are paid to you , less the factoring companies fees.

If you want to get the cheapest factoring possible, you would want to work with a Factoring company that is very hands off and expects you to follow up with the customer and get the money paid on time.

There are some real advantages to this in that the faster the customer pays their bill, the lower your cost of borrowing will be from the factor.

The opposite end of the spectrum are Factors that control 100% of the collection process once the sale is made.

In these scenarios, the cost is higher as there is more work involved, but for many smaller companies this is willingly paid as they do not have the person power to manage a growing list of accounts receivable.

The change in these "high touch" situations is that if you took the time to crunch the numbers, it may very will be more economical to hire a part time or even full time person than pay the incremental service fees.

In some cases, the high touch, high contact model's profitability is built around the fact that you don't crunch the numbers and that they can do the work way more efficiently than you can.

Some businesses don't like the idea of another company collecting their money and potentially damaging a customer relationship.

Other businesses want to focus all their efforts into making more sales and delivering the product or service.

And regardless of your own company profile, the accounts receivable financing services that fits your needs, is usually the deciding factor (no pun intended) in choosing the financing company to work with.

Therefore, make sure that you take the time to not only understand the different service offerings among the Factors you choose to speak with, but also take the time to overlay the chosen accounts receivable financing services across your business model to see if they truly fit and add value.

Other Accounts Receivable Financing Services You Might Not Have Thought Of
The goal of a Factor is to get a good quality receivable to finance.

However, sometimes a business selling goods cannot get the goods into a selling position to create the receivable.

In these situations, where the supply is reliable, and financially stable, certain Factors will offer versions of short term inventory financing and purchase order financing to their customers in order to help create a sale and a receivable.

This can be an extremely beneficial service to product oriented companies with a relatively short sales cycle.

However, this type of service is not usually offered until the Factor has had some experience financing your core receivables.

Here's Something Else To Consider

Most Factors do not offer a broad range service model.

Why?

Because, like everything else, if you want to get good at something, you have to specialize and get really focused on the details of your business model.

Beware of Factors that claim to be all things to all people.

Remember that, regardless of their level of service, they are all in direct contact with your customers to some degree.

As such, their customer interface needs to be seemless, professional, and absolutely predictable.

In my opinion, anytime a Factor tries to go in too many directions with their accounts receivable financing services, they're looking for trouble and the trouble will be at your expense.

At the same time, the right service offering from a Factor that specializes in that particular offering can add real value to your business processes and customer service.

Some industries may demand a higher level of Factor involvement in collections and may not afford you the same amount of accounts receivable financing service choices.

But in most cases, there are choices to consider in the market place.

Here's where you go to contact me about Accounts Receivable Financing Services

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