Preparing for Entrepreneurship – Establishing Operating Capital for Business Longevity – Week 3

Everyone knows that starting your own business is not a piece of cake, and sometimes, the pinch at the beginning happens again in the middle of your business’ existence, and again at another point in the future. What isn’t always discussed is ways to get through these rough patches.

Week 3: Accounts Receivable Factoring

This week’s topic, accounts receivable factoring, (also known as factoring, or invoice factoring) is one of the more complicated topics to understand, but is a very useful tool for up-and-coming entrepreneurs.  Basically, it is the selling of the business’ accounts receivable to a third party, known as a factoring company, at a discount.

It’s time to brush up on some accounting terminology – accounts receivable is money owed to a business by its clients; an account of money owed to you.  So in laymen’s terms, it’s selling your IOUs.  If your business is short on cash and in need of an immediate infusion, it’s a highly viable option for getting yourself out of a pinch.

Happily, accounts receivable factoring companies are specifically set up to deal with these types of transactions and help you through a rough patch. The key to success with accounts receivable factoring is to select the right business partner with whom to work.  It is usually better to go with a company that is well established, has stood the test of time and one that has expertise in the specific industry your business is in. says “With the amount of complexity and nuances involved in various industries, teaming up with a partner who understands what you do will usually turn out better for your business. Ask the accounts receivable factoring company you are evaluating if they have a client similar to you in their portfolio. If you are a retail business, ask if they have other retail clients. Industry experience is a key factor in determining your success with factoring.”  Keep in mind though, the age of the receivables has a significant effect on the amount the company receives; the older the receivables, the less the company can expect.

Have you ever looked into selling your accounts receivable?  What information did you come into when searching?  Did it seem like a good investment?