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Accounts receivable financing is used by businesses to convert sales on credit terms for immediate cash flow. 1st Commercial Credit adopts a quick and simple approval process and expedites initial funding in 3 to 5 working days.
learn moreInvoice factoring is a funding method in which a factoring company buys accounts receivable for immediate cash (payment). Invoice factoring helps businesses alleviate their cash flow issues as these cannot wait months for customers to pay invoices. For each invoice purchase, you and the financing company will go through a purchase agreement. In this purchasing process, the factoring company notifies the payer (your customer) of the purchase and verifies the invoice's validity. Invoice factoring requires no credit checks to qualify. Many companies in various industries use this type of financing as they find it more beneficial.
Another type of financing is an asset-based loan (ABL), a loan or line of credit that is secured using company assets as collateral. The collateral used for this type of financing includes accounts receivable, inventory, equipment, and other assets. Many asset-based loans are structured as lines of credit. They give the company access to funds to pay business expenses or make new investments. The lender will use the assets' established value to determine the borrowing base, which is the sum of money a business can borrow. The borrowing base is a percentage of the market value of the assets. ABL lenders often offer a loan-to-value ratio of 75% to 90% for accounts receivable. Other collateral, such as equipment or inventory, is financed at a lower loan-to-value ratio, usually 50% or less.
Factoring and asset-based lending may have some similarities, but they are very different. The following will help you understand the differences between these products and help you determine which one is best for your business.
Differences Between Asset-Based Lending And Invoice Factoring
Risk — Factoring receivables is available to new and growing companies that may not be eligible or qualify for traditional bank financing. Because of this, factoring is considered to be a riskier form of funding for the lender. On the other hand, asset-based loans are only for more extensive and more established companies. While these companies could still struggle to qualify for traditional bank financing, they are well on their way to being "bankable."
Cost — Generally, asset-based loans are considerably cheaper than invoice factoring. The price of a factoring line is established by discounting the total value of the invoice by a percentage. Discounts can range from 0.69% to 1.59% per 30 days. On the other hand, asset-based loan prices are established at an annual percentage rate. This annual percentage on ABL's can range from 7% to 15% and is based on many variables, such as line size and risk.
Size — Asset-based loans start with a borrowing base of around $700k and go up to a few million. With factoring, financing lines have no minimums and can work with small businesses and startups.
Discretion — Because the factoring company owns your invoices, they will be the ones reaching out to your customer for payment. In addition, a factoring company generally will require that your customer make checks payable directly to them. When working with asset-based loans, the lending company will not contact your customers, and they will not know about their involvement. This means your company will continue to handle the collections of your receivables.
Due diligence — Most factoring facilities do minimal due diligence. Usually, a factoring company will review a client's financials and conduct a collateral search. This assessment is often done in a day or two and is inexpensive.
On the contrary, asset-based loans require that the lending companies conduct a more substantial due diligence due to their structure and size. Lending companies will perform collateral checks and audits to review the accounting and financial records. The cost for this process can be a few thousand dollars, but prices can vary.
Which Option Is The Best For Your Richmond Business?
Most businesses prefer to use asset-based loans over factoring due to their overall cost and flexibility. Still, asset-based loans typically have high due diligence costs and are available only to companies that meet their collateral requirements and size. On the contrary, factoring is open to companies of all sizes, has minimal due diligence costs, and is easier to get.
Businesses that invoice clients can often find themselves in a financial struggle while waiting for clients to pay for those invoices. The time extended on payment terms for invoices can vary depending on the industry and business, ranging from 2 weeks to 90 days or more. This situation can be challenging, especially for those small businesses or startups just starting out and eventually forcing them to halt business operations.
For businesses in a similar situation, a factoring company might have the answer. With invoice factoring, a business will get a cash boost immediately and with a lot less paperwork and limitations than with a bank. Factoring will unlock the cash currently tied to unpaid invoices and give you the equivalent of an agreed percentage of those invoices. The lending company will then collect payment on those invoices. Once payment is received in full, your business will receive the remaining reserve, minus a percentage for the factoring services.
In many cases, manufacturing factoring is a better choice than any other traditional form of financing. The process with invoice factoring companies for manufacturers is fast and more straightforward. We also take responsibility for collections so you can save your time and focus more on other essential aspects of your business. A factoring company will base the approval decision on the creditworthiness of your clients and not your own. So if your credit score is less than perfect, we can still help.
Industries that commonly use factoring
5 reasons why manufacturers should use factoring services
For instance, imagine you have the opportunity to land a significant new client, but only if you could provide inventory fast. Your manufacturing company and staff are up to the challenge, but you're short on materials and working capital. If you had the cash, you could speed things up and deliver for the new client. Manufacturing factoring will give you access to the money you need to take the opportunity. When considering options to improve your cash flow in the short term and find yourself in a similar situation to the one described above, factoring becomes the best logical choice.
Here are some other good reasons to use a factoring service:
A freight broker is a company or a person who connects a shipper with goods to transport with an authorized carrier looking to provide its services. In short, freight brokers help shippers find reliable carriers at a reasonable cost. Brokers provide valuable services, and in some cases, brokers will take care of coordinating all the shipping and transportation management needs of a business.
As an intermediary, often having to wait to receive payment from a client will significantly slow your business down. This situation will cause challenges when making payments to carriers, which will result in being unable to take on new loads. 1st Commercial Credit provides financial funding services for all freight and trucking industry-related companies, allowing you to resolve the payment gaps and continue moving forward. Our freight factoring services make it possible to continue running and growing your business without turning to traditional business loans.
We Make Factoring An Easy and Quick Process
Freight broker companies don't have to be forced to wait 90 days or more for payments to come in. These businesses in Richmond can use freight factoring services to pay carriers and cover operational costs. The factoring transaction involves a factor that buys a company's unpaid freight bills for an advance of up to 98% (depending on the industry) in 24 hours or less. The factoring company will then be responsible for collecting payment directly from your customers. Our funding process is attainable and straightforward and gets you the fast cash you need to run a successful enterprise.
1st Commercial Credit is an experienced factoring company in Virginia offering several financing services to freight businesses. Some of these advantages include:
Access to unlimited funding potential — freight factoring provides a flexible solution that can be adjusted to the growth and goals of your business. Factoring uses the freight bills you submit, and as your business grows, so do your funding possibilities.
No minimum or maximum requirements — 1st Commercial Credit offers a flexible financial solution as we do not have a minimum or maximum amount to be factored in.
Electronic submission and online reporting — we make the submission of freight bills a fast and straightforward process that is done electronically. You will also have access to our online reporting portal 24/7. You will have access to collections status, recent transactions, and other crucial information.
Discount with carriers — by having access to funds within 24 hours, you will be able to pay carriers immediately, which will also mean you will be eligible for lower rates.
Administrative support — We provide complimentary back-office services such as credit checks and collections to ensure clients will make payments.
The process of factoring is not a loan. Instead of waiting 30,60, or even 90 days, your company will get paid "earlier" for services/products that it has already provided. Unlike traditional banks that sometimes can take a long time for processing and approval, funding with 1st Commercial Credit will provide funding in 24 hours or less. Even businesses with low or bad credit or just starting can receive financing. If your company has been turned down in the past for other types of funding, freight factoring is the answer. You can use factoring for a short-term financing need or continue for a more extended period.
Richmond is a dynamic and culturally rich region that offers its residents and businesses many advantages to grow. It is a vibrant metropolitan area, and its economy is driven by finance, law, and government. Richmond is home to many industries and seven Fortune 500 headquarters, including DuPont’s. Richmond was ranked #6 for large metro areas with the fastest growth with a workforce to fulfill the diverse job opportunities.
The City of Richmond offers a unique quality of life in urban, suburban, and rural settings and affordability. The Richmond metropolitan population is nearly 1.3 million. There are about 30 regional higher education institutions, including Virginia Union University, Virginia Commonwealth University, Virginia State University, Randolph-Macon College, and the University of Richmond, which train and provide the next generation of skilled workers and professionals, enabling Richmond to attract and attract and retain businesses of all kinds and sizes. Richmond has grown into a prosperous, cosmopolitan destination known as a region with a southern charm and history.
1st Commercial Credit is a company factoring receivables in Virginia and various cities including:
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