How Does Accounts Receivable Factoring and the Card ACT Aid Small Businesses?

You are probably a proud owner of a start up business and you are well aware that financial restrictions have great impact on your business. Based on the Federal Reserve, a little more than one third of small businesses used business credit cards in 1998, whereas that rate currently stands at about 64 percent, showing that the use of business credit cards has increased considerably. On the other hand, a less utilized but possibly more efficient means of getting cash, referred to as accounts receivable factoring, is now gaining popularity worldwide.

There is a 256 percent increase in the use of professional credit cards in the second quarter, which translates to about 46 million credit card offers being shipped by banks and issuers as well. However, there is only a 29 percent increase in credit card mail solicitations. There is indeed an emphasis on the business industry thus leading small business entrepreneurs to inquire about the poor protection of corporate credit cards. (Source: Synovate, a market research company.)

Enterprise debt that appears on personal credit cards can adversely affect your credit score. An important factor in a FICO score is quantity of debt you have as a percentage of your available credit — ideally about 30 percent. A business debt on your private credit card can increase the percentage of the debt-to-available credit, which then drops your credit score.

The truth is businesses need not get into credit debt. All they have to do is start implementing simple methods that will help them grow without accumulating huge debt. This accounts receivable factoring has helped a alot of enterprise flourish through the years. It is efficient at securing funding for small businesses without debt through small business loans. Capital for day to day expenses, payroll, and enterprise expansion is being offered by a factoring company.

Traditional lenders do not really view your current accounts as receivables, which is in contrast to accounts receivable factoring thus making it an effective small-business tool for financing. There are several accounts receivable factoring companies offering clients a “use it as you need it” financing option called single invoice factoring, whereby every invoice purchase is a separate transaction and does not form part of a portfolio lending strategy.

The transaction is modeled as a buy-sell transaction. Here are the ways:

Appropriate Diligence – This is a program conducted by these companies in order to assess the client, this usually takes around 24 to 48 hours.

Invoice Evaluation – after the research, the client can now present their invoices to IFG and IFG gets to decide to purchase it or not.

At some point, the terms and conditions attached to professional credit cards are a few steps back for people who finally get to benefit from the CARD Act. Signing up for a small-business card returns consumers to the less-protected loans with penalty rates and immediate interest rate increases. In accounts receivable factoring you could be sure that there is no build up of debt.

Organizations including the National Small Business Association have started lobbied for laws to include small-business cards in CARD Act protections, but for now small business are stuck. Because of the CARD Act protections, it is truly tempting to use a personal credit card for business, but that might not be a very bright idea. You cannot use the business expense tax write-off to pay interest payments when using a consumer credit card and separating personal expenditures from business expenses can be very confusing.

To sum up, in order to help your small business stay afloat during this tough economy, avoid using credit cards or acquiring high interest loans. Rather begin applying accounts receivable factoring, for more control over your money and future.