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What is Accounts Receivable Factoring?

4 min read

Accounts receivable financing businesses provide small to mid-sized companies a method to help them get ahead (financially) – or to help the companies get through a tough financial time (as smoothly as possible) – even if the businesses have less than perfect credit scores.

By playing a chief role in enhancing a company’s cash flow, accounts receivable factoring businesses assist with putting business owners back in charge of their financial aspects of the company.

What does Accounts Receivable Factoring Mean?

Accounts receivable factoring companies offer this method as a solution that permits company owners an opportunity to turn invoices into working capital (or networking capital).

Rather than waiting many weeks or several months for consumers to pay their invoice bills, accounts receivable financing permits small to medium companies to get their money quicker – advances on invoices. The companies could use the funds for necessary business requirements – rather than waiting weeks or months to do so.

It is perfect for companies that have long net arrangements however have continuing operational costs or new costs that assist the businesses to boost growth.

Accounts Receivable Factoring Businesses

Small to mid-sized businesses could sell their receivables to accounts receivable financing companies, companies that focus on these types of financing transactions. Purchasing receivables is also referred to as a factor. Another title for the term accounts receivable factoring is invoice factoring.

Comprehending Accounts Receivable Financing – How Does it Work?

The factor is the financing company that buys receivables from another business. The factor then collects installments on the purchased receivables from the business’ consumers.

Businesses might choose receivables factoring if they wish to obtain funds quickly instead of waiting for customers to pay the entire debt – like 60 days or 90 days later. Factoring offers companies a way to build their cashflow almost instantly. Then, the businesses could pay any remaining or new monetary obligations.

In other words, businesses could free up capital with this option – may be capital that is tied up in other accounts, like receivables. Also, it additionally transfers the risk of default to the financing company that buys the receivables.

Accounts Receivables Factoring Companies – Pricing

Factoring businesses charge fees – referred to as factoring fees. The fee is a proportion of the sum of receivables a company needs to be factored. Rates that financing companies charge vary and are contingent on:

  • The company’s trade
  • The size of receivables the business needs factoring
  • The credit rating and quality of consumers
  • Average Days Outstanding (days Sales Outstanding) the receivables are

In addition, the percentage is contingent on two additional aspects:

  • Recourse factoring or

o          Financing companies that offer receivable factoring services generally charge less of a rate for recourse factoring

  • Non-Recourse factoring

o          Financing companies that offer receivable factoring services generally charge a higher rate for non-recourse factoring

Example:

When the factor means there is more risk to collect the bad debts (in the scenario of non-recourse factoring), a larger rate is necessary to help recompense for the risk the financing company is taking.

Essentially, the more relaxed the financing company feels about the receivables collection process, the less the company would charge for the factoring fee.

Accounts Receivable Factoring Companies – What Kinds of Businesses do they Work with?

Many industries need this kind of financing opportunities. Businesses ranging from manufacturing to transportation to trucking to distributing – numerous companies in today’s marketplace – even ones with higher profits might face cash flow challenges. Why would that occur?

Consumers might not pay their credit bills as quickly as businesses would prefer. The longer a company waits to get paid, the lack of payments could cause a negative influence on a company’s working capital. Let’s say a small company supplies goods to a huge company (a Fortune 500 Company, for instance – or a governmental agency). The consumer might utilize his or her position to his or her benefit by waiting to make any payments, for as long as he or she possibly can.

What are the Usual Rates for Financing Receivables?

Factoring receivables expenses mostly depend on three aspects:

  • The proportion of sum of receivables to be factored – Most fees start anywhere from 0.5 percent to 5 percent – monthly.
  • How long it might take to collect the receivables – the less time it takes for the financing company to collect the money from consumers, the less the business will pay for the service.
  • Extra fees – Within each factoring terms, there could be additional fees – read the factoring agreement, as there may be some outlined within it.

Keep in mind: selling receivables and factoring accounts receivable is not a loan process – businesses could get funds faster, but it is not a business lending process. Companies that offer factoring are not lending institutions (like banks). They are financing companies.

If a company, small to medium-sized, is in a pinch and needs cash to boost growth or needs the resolution to fill short-term money needs, invoice factoring is an ideal choice. Before contacting an accounts receivable factoring business, it might be a good idea to comprehend all the business requirements, inquire about the correct topics, and read the terms before agreeing to them.

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