Accounts Receivable Financing, Tax Write Off And What Does It Cost?
Picture: Accounting Receivable |
Accounts Receivable Financing, Tax Write Off And What Does It Cost? Banks won't lend money to a business seeking to acquire larger contracts because its not viewed as an asset.
So if you are a small start up company, funding for
expansion may be hard to obtain. Accounts Receivable Financing could be the key
to funding for a start up with desires to bid on large Government (or
Corporate) contracts.
So what is Accounts Receivable Financing? It is the selling
of your accounts receivable invoices for cash versus waiting 30-60 or 90 days
to be paid by your customer. Accounts Receivable Financing is also know as
Factoring.
Securing the services of an Accounts Receivable Financing
Company will allow a small company to bid on almost any contract within reason.
A small company would know in advance that the funds needed to produce goods or
provide services are available once they win the contract.
In fact, some A/R Companies will advise you on which
companies they will Factor Invoices from and which to avoid! (Federal
Government contracts are considered "gold" however not all Factoring
companies can handle Government Receivables)
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The Purpose of Your Accountant
One of the major concerns for most small business owners is
how much does Accounts Receivable Financing cost? Between 1 to 5% generally
speaking.
Since Accounts Receivable Financing rates depend on the
credit-worthiness of your customers, your average invoice, average payment
cycle, and factoring volume, its hard to predetermine the exact cost of the
money.
However, you should remember, whatever the cost is: Its TAX
DEDUCTIBLE and this is important. This means that the cost to factor is offset
by IRS.
Not all Factoring companies are created equally (you can't
tell that by looking at their web pages). A Cash Flow Consultant or an Accounts
Receivable Broker can stir you in the right direction. Accounts Receivable Financing, Tax Write Off And What Does It Cost?
There are issues such as:
Process to acquire funding, will the Accounts Receivable
Financial company (factoring) company handle your collections, will they
provide the funds through a credit card or will they wire the monies into your
business checking account.
Will the Accounts Receivable Financial company factor with
recourse or without recourse? (Meaning will they take responsibility for the
debt or will you the client take ultimate responsibility? The rates are
different).
Sometimes an A/R Broker has a choice, but not all the time.
For instances, there are not that many companies that provide Accounts
Receivable Financing for health care or construction. It all depends on what
type of business you have and what your needs are. (*)