Accounts receivable financing may be a beneficial opportunity for your organization. However, before you decide to use this opportunity, it is important to ensure that you understand all that is involved.
Factoring
The two types of factoring staffing relationships are recourse and non-recourse. In both forms of factoring, the factor has ownership of the receivables. However, in the case of non-recourse factoring, the staffing company is not required to buy the receivables back within a certain amount of time.
The benefits of factoring include:
- Underwriting is faster
- Greater flexibility compared to bank financing
- Financials and guarantees may not be required
- Customers’ credit is often used as a determining factor
- Owners do not take on the risk of receivables (in non-recourse factoring)
- No concentration limits
The potential drawbacks of factoring include:
- Credit limits are imposed based on customers
- The Factor’s name appears on invoices sent to customers
- Invoice verifications are required prior to funding
- Customer checks may be sent directly to the Factor
- Many factors lack industry expertise
- Paychecks may have clearance delays
Accounts Receivable Financing or Specialty Asset-Based Lending
Specialty asset-based lending is similar to accounts receivable financing. However, the primary difference is that specialty asset-based lending is industry-specific. This provides the expertise that would not otherwise be available in this type of financing.
Benefits of specialty asset-based lending include:
- Greater flexibility so staffing companies can take advantage of opportunities for growth
- Greater detail in reporting to better understand the company’s true financial picture to facilitate better strategic decisions
- Resources such as administrative support, processing payroll, tax guidance, workers’ compensation advice, assistance preparing financial statements, among other support
Some potential drawbacks of specialty asset-based lending include:
- A longer underwriting process
- Personal financial statement, personal guarantees, and credit reports required for approval
- Concentration limits (typically between 25% and 75%)
- Not all asset-based lending is staffing-specific
- Paychecks may have clearance delays
- Limited requirements for financial reporting
Once you understand the benefits and potential drawbacks of these types of financing, you can make the right choice for your organization to achieve your goals.
