Synchronization of AR Cycle with AP Cycle

When a company is trying to keep current with periodic payments, it is difficult when the accounts receivable cycle is longer than the accounts payable cycle. Cash flow problems result in that type of scenario.

More time is required to collect on business to business and business to government invoices. Before 2008, the average cycle was about fifty-four days. Thereafter, the average cycle went to almost fifty-nine days. Most accounts payable cycles are thirty days.

If the company is a young and growing company, does not have adequate financing, and has a discrepancy in the amount of time it takes to get paid for invoices compared to when bills are due, it becomes impossible to pay bills on a timely basis.

A business needs to establish credit and a track record in order to borrow money from conventional banking sources. When the company establishes a line of credit adequate for operational needs, the company is in a position to rely on a conventional line of credit.

However, until being able to establish a credit line, sometimes it becomes necessary to raise money alternatively. A company can sell some assets in order to be able to do so. Business assets are created when invoices are issued. Therefore, one of the best ways to raise money under those circumstances is to sell their accounts receivable.

Accounts receivable financing or factoring is a viable alternative for certain companies who deal with other companies or the government. A factoring company will advance eighty-percent of the amount of an invoice almost immediately after an invoice has been submitted. Then the factoring company waits for payment and pays the twenty-percent reserve upon receipt of payment for the invoice.

This allows the company to have the cash flow to be able to continue filling additional orders without causing a cash flow crunch. Factoring invoices is a temporary means of taking up the slack until a company is able to qualify for a conventional line of credit.

A company invoicing another company or the government and extending thirty days until payment is due is actually making a non-interest thirty-day loan. It is important to determine whether or not the client being extended these terms is credit worthy. It is better to not do business at all rather than to do business with a company that is not going to pay. Factors help companies determine creditworthiness of companies who will be paying the invoices in order to minimize their own risk as well as the company benefiting from factoring.

Receiving credit cards for payment is widely recognized as a way of doing additional business for the cost of a discount fee. Factoring invoices is similar to receiving payments for credit card invoices. One of the differences is a credit card company pays the amount of the invoice minus a discount whereas factoring invoices involves two installments minus the discount fee.

Savvy companies that know the time-value of money know it is worth paying a discount for factoring invoices in order to have adequate cash flow. It is often possible to offset the cost of factoring by taking advantage of early-pay discounts offered by suppliers. Conversely, if a company has been offering early-pay incentives to their clients, the cost of factoring can also be offset not only by taking advantage of early-pay discounts offered by suppliers but also by discontinuing the practice of offering early-pay discounts to clients.

The application process in applying for conventional loans and lines of credit can be a process taking valuable time that could otherwise be spent in more effective business operations. The process of applying for factoring is quite simple with a quick response from the underwriters. Usually, a factoring company will accept or reject the application within a couple of days rather than weeks or even months.

Once the factoring company has determined the invoices can be factored, additional paper may be required. However, funding can be expected within ten business days from filing the additional paper work. An advance can be made on all of the eligible outstanding invoices on the initial funding. After subsequent invoices are submitted, they are paid almost immediately upon receipt of invoices.

It is necessary for the factoring company to be able to assume a first collateral position only on accounts receivable and not other assets. If the company has a business loan protected by a UCC-1 filing, it is possible to get the bank to subordinate making it possible to factor the invoices. Banks are often willing to subordinate so the business will assume a stronger position to be able to make periodic payments to the bank. ..

It is possible for a company with tax liens to be able to factor invoices. The company would be required to clear the lien with the initial funding before the money could be used for other purposes. However, unless there is a lien, the company is allowed to use the money for any purpose it deems necessary.

Underwriters are usually able to determine whether a company's invoices can be factored with a look at the aging accounts payable, accounts receivable and a copy or copies of invoices used by the company. Viability of a company can be determined by the factoring company.

Incurring debt is different from factoring. If you have a business needing immediate cash without incurring debt, find a broker who can match a factoring company that will factor your invoices.

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