Keep your capital working by turning your accounts receivable into immediate cash.
How? Third-party companies often referred to as "factors" will outright purchase your accounts receivable (invoices) in generally two phases.
Phase One: Immediate cash for as much as 90% of the invoice’s total value.
Phase Two: Upon full payment of the order(s) by your customer to the factor company, you will be remitted the balance less a small factoring fee. When considering commercial account receivable factoring, it is important that your business has customers with a great debt record. You would not want to sell a factoring company receivables that they would not be able to collect on.
So the remaining questions are simple:
Why give up any ownership of your company to obtain working capital?
Why borrow money long term when you can factor your invoices for immediate cash?
Why wouldn’t you desire to: Expand into new markets; Work with larger customers; Receive professional assistance with evaluating new customer’s ability to pay?
If your business extends credit to customers on net terms, depending on how long the terms are for, you must wait a while before you can actually get paid. Until then, you are left with accounts receivable. Accounts receivable are simply future payments that you are entitled to collect for goods or services provided after a given amount of time. A factor company purchases your receivables by giving you an advance payment up front. This advanced payment is usually 70 – 90% of the total value of the receivables. After charging a small fee (2% and up) the remaining balance is released upon full receipt of payment for all the receivables/invoices. This allows your business to be able to make those larger sales and still have the working capital to continue operations and further growth.