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Factoring Receivables Example

Cash flow is important in every business, but for some, short-term cash flow can become an issue when revenue is tied up in invoices owed to your company. This can lead to problems paying for expenses or even making payroll even though your company is making enough sales on paper to cover costs. More and more, businesses are utilizing factoring when they need a quick boost to their cash flow as an alternative to going into debt.

What is factoring?

In broad terms, Accounts Receivable Factoring is the exchange of creditworthy commercial accounts receivable for an immediate injection of working capital.

Factoring occurs when businesses sell their invoices to a third party financial company in order to receive and immediate cash payment as opposed to waiting 30 to 60 days for the customer to pay.

The terms of factoring can vary depending on the company you choose to work with, but in most cases invoices are purchased with an advance of anywhere from 75%-90% of their net amount. The reserve portion (minus a servicing fee) is delivered after the customer pays.

Factoring in 5 steps

  1. A business performs a service for their customer or client.
  2. The business sends the invoice for the service to a factoring company.
  3. The factoring company pays a cash advance on the invoice.
  4. The full payment for the invoice is collected by the factoring company.
  5. The factory company pays you the rest of the invoice amount, minus a fee.

Who uses factoring?

The companies who use factoring to increase their cash flow range from small, one-person business to huge corporations and everything in between. Various industries like trucking, textiles, and even staffing agencies use the cash they generate from factoring to expand their operations, buy equipment or cover practically any expenses related to their business.

Factoring Examples

To better illustrate how factoring works, here is a factoring receivables example.

ACME Corp is a shipping company who has just landed a new client who needs freight shipped across the country. The customer will have 30 days to pay for the service, but ACME Corp needs immediate funds to cover the expenses involved with shipping the freight.

Instead of applying for a loan or turning down the client’s request, ACME Corp turns to Diversified Funding and sells the clients invoice in exchange for a quick 80% advance on the total amount. With the cash they received from factoring, ACME Corp can now cover the immediate costs of running the shipment.

Here’s a Profit Comparison Chart you can review for more examples of how factoring accounts receivable can not only boost your cash flow but also increase your bottom line.

Profit Comparison Currently With Factoring
Annual Sales $1,000,000 $2,000,000
20% Gross Profit $200,000 $400,000
Overhead $60,000 $80,000
Cost of Factoring N/A $60,000
Net Profit $140,000 $260,000
Net Additional Income $120,000

Is factoring right for you?

Does your business need cash to make payroll? Would you like to be able to offer terms to your customers without pressure and have enough cash flow to take on new customers? Whatever your need is for more working capital AR Factoring may just be your answer.

Get a free quote from Diversified Funding today. Unlike other companies, we won’t pressure you non-stop or flood your inbox with spam. Instead, we’ll work with you one-on-one to provide you with the best solution for your business.

Diversified Funding Services was founded in 1998 by Mark Little with the mission to provide businesses the opportunity to obtain critically needed cash flow for their companies with Account Receivables financing, traditionally known as Factoring.

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Diversified Funding Services, Inc
125 Habersham Drive / Suite C
Fayetteville, GA 30214
Toll Free: (888) 603-0055
Phone: (770) 603-0055
Fax: (770) 603-9823