Accounts receivable factoring is a finance solution that helps businesses to overcome cash flow gaps caused by extended payment terms.
A cash flow gap can be hugely detrimental to a business. In many cases, maintaining cash flow is the deciding factor in the survival of a company.
According to the latest report from the Australian Securities & Investment Commission, 51.2% of insolvent companies cite inadequate cash flow as the cause of failure.
Applying for a loan from a traditional lender can take up to 3 months before being approved. Banks also have strict lending criteria that mean a conventional loan is out of reach for many businesses. Accounts receivable factoring enables companies to access a quick cash flow injection when they need it.
What is Accounts Receivable Factoring?
Accounts receivable factoring lets businesses take control of their cash flow by using unpaid invoices as collateral to access funding. It’s a business finance solution that is also known as accounts receivable financing and invoice factoring.
Many businesses choose to use invoice factoring to access funding without using their property as security. You can use your assets (unpaid invoices) to access immediate funding to cover operational costs and capitalise on opportunities for growth.
Why Do Businesses Need Accounts Receivable Factoring?
A lack of cash flow is the most common reason for businesses in Australia to fail. Maintaining enough working capital is vital for business growth and survival.
Your business doesn’t operate in a self-sufficient bubble. It relies on its customers to make payments on time. Unfortunately, that’s not always the case, with late payments a problem for the majority of businesses in Australia.
According to an Australian Small Business and Family Enterprise Ombudsman survey of business owners, 100% of respondents have suffered from late payment of an invoice in the last financial year.
Proportion of invoices paid late in the last financial year:
Around half of the respondents reported that over 40% of their invoices were paid late.
An increasing number of businesses use accounts receivable factoring as a finance solution to avoid cash flow gaps. Releasing the capital from receivables puts the company in a stronger financial position. You can focus on fulfilling orders and exploring opportunities to grow your business.
How Does Accounts Receivable Factoring Work?
Once you have completed a project or fulfilled an order, you raise an invoice for the amount due. The invoice recipient will pay the invoice, but this can take up to a period of 30 days. If the invoice is paid late, receiving payment will take even longer.
While waiting for payment, you need to pay your employees, settle invoices with suppliers, and purchase materials/stock for your next orders.
This is where accounts receivable factoring can help you to maintain working capital. You can use the unpaid invoice as collateral to access business funding.
Within 24 hours of raising an invoice, you can receive up to 95% of your invoice amount minus fees. When the invoice is collected, you receive the remaining amount of the invoice balance.
Many businesses choose to use an end-to-end invoice factoring service. ScotPac can manage your accounts receivable and collections while you focus on your business. You can also choose a confidential funding arrangement and use invoice finance to plug cash flow gaps when you need to.
The Benefits of Accounts Receivable Factoring
The key advantage of accounts receivable factoring is the ability to unlock tied up capital and improve cash flow. But there are many advantages with solutions that can be tailored to the unique needs of your business.
Waiting for 30+ days to collect receivables is a drain on cash flow and stunts business growth. Accounts receivable factoring lets you access those funds quickly so you can take care of your operating expenses and capitalise on growth opportunities.
We offer an end-to-end factoring service. You can focus on growing your business and avoid overextending with customers. We can handle customer risk assessments to protect your business from bad debt.
Avoid Long-Term Debt
Accounts receivable factoring is a flexible source of business finance. You can access fast funding with a no minimum term contract to cover cash flow gaps. You don’t need to use your property as security or incur any long-term debt.
You can save time and money by using an end-to-end invoice factoring service. Rather than dealing with accounts in-house, we can handle your collections administration. You can focus on your business, knowing that your invoices are being collected.
Fast Access to Funding
Once your application is approved, you receive up to 95% in as little as 24 hours of raising an invoice. While a traditional business loan can take months to be approved, you can receive funding within days of applying for accounts receivable factoring.
The Cost of Accounts Receivable Factoring
Factoring companies charge a “factoring fee”. This fee is a percentage of the receivables being factored. To calculate the rate of the factoring fee, the factoring company will assess:
- The industry the business operates in
- The number of receivables to be factored
- The credit rating of the business’s customers
- The number of days the receivables are outstanding
The rate of the fee also depends on the type of receivable factoring. Recourse factoring is usually charged at a lower rate than non-recourse factoring.
Recourse factoring places some of the risks with the business seeking to factor their receivables. If the lender cannot collect from the customer, they can claim money back from the business.
Non-recourse factoring places all of the risks of uncollected receivables onto the lender. If the lender cannot collect from the customer, the business faces no liability for the loss.
Because the lender bears all of the risks with non-recourse factoring, they will charge a higher rate factoring fee. With recourse factoring, the business maintains some liability for the receivables if collection is not possible. Because of the reduced risk, recourse factoring is charged at a lower rate factoring fee.
Invoice Factoring Solutions
Cash flow is the lifeblood of a business. Accounts receivable factoring lets you quickly access a cash flow injection when you need it. It puts you back in control of your business finances by releasing capital tied up in unpaid invoices.
ScotPac offers a range of factoring solutions to help you access your money faster. With a faster payment turnaround and access to capital, you can cover your operating costs and capitalise on new opportunities.
You don’t need to use your property or personal savings to plug cash flow gaps at your business. With invoice factoring, you can access a line of credit that grows in-line with your business.
We provide a dedicated service that is tailored to your unique business needs. You can choose a confidential no minimum term contract or an end-to-end service that manages your accounts receivables and collections. You can focus on growing your business with the cash flow you need.