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Need Cash Fast? - AR Factoring vs. Bank Loans

By Amanda DiSilvestro

When most people think of a restaurant, they think about the servers taking orders, ringing in food, filling drinks, delivering food, and cashing out tables; however a restaurant can be just as hectic behind the curtains. From a financial standpoint, it is important that your restaurant has the funds it needs immediately because this is a business that cannot be put on hold while expenses or taxes are figured out. If your restaurant needs funds immediately in order to stay afloat, accounts receivable (AR) factoring is something to consider. An accounts receivable or invoice factoring company can definitely help get you the funding you need.

AR factoring is the act of selling your invoices to a financial company known as a Factor. Once you do this, you will receive cash funds as early as 24 hours. With AR factoring, you sell your invoices at a discount of around 2% through 5%. Usually a Factor will discuss a rate with you based on your customers' payment history, your invoice size, and the volume of invoices.

The great thing about AR factoring is it does not hinge on your credit history, but rather the credit-worthiness of your customers. The Factor Company will assess whether or not your customers can pay their invoices on time and factor that into your accounts receivable. The great thing about AR factoring: you can choose which invoices you want to have factored, so you can actually pick and choose the specific customers you want to be a part of your AR factoring.

AR Factoring vs. Bank Loans

It is important to realize that AR factoring is not a bank loan. Both options are a great way to secure funds for a company, but consider some of the differences between the two:

AR Factoring
  • Can be available in a few days, in some cases even 24 hours
  • Provides a steady pace of funds
  • Factoring converts your accounts receivable to cash, so your balance sheet is improved
  • Provides credit information on customers
Bank Loans
  • The loan could be available anywhere from one week to one month
  • Usually one large cash amount
  • Bank loans add debt to your balance sheet

In some cases, restaurants that are not approved for a bank loan turn to AR factoring. Due to the current credit crunch, bank loans can often be difficult to get, but factoring funds are still easy and available.

A Few Quick Tips

If you feel your restaurant would best benefit from AR factoring, there are a few tips to keep in mind. The first thing you will have to do to get this process started is find a Factoring Company. It is important to realize that not all Factoring Companies are the same, and there are a few specific things you should look for when researching:

  • Look for any contract obligations. Some companies require a long-term contract while others do not.
  • Some companies will require higher minimum sales than others, so be sure to call each company and ask about these requirements.
  • As with any service, there are always hidden fees, so be sure to pay attention to the fees than a Factoring company may have in place.
  • Some companies will assign your restaurant a specific agent. This is a great feature and often allows for easier communication should you have a question.

Amanda DiSilvestro is a writer on topics ranging from AR factoring to debt consolidation for Resource Nation, an online resource providing tips for small businesses and entrepreneurs.

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