Accounts receivable factoring

Accounts receivable factoring is a unique cash flow strategy for businesses. With this technique, also known as accounts receivable financing, a third party buys your accounts receivable invoices to provide you with capital up front.

How accounts receivable factoring works

There are several steps to the accounts receivable factoring process:

1. You don’t have the time to go after payments on your invoices, or you realize that you need more immediate capital for your business.
2. You approach a factoring company, or “factor”, and offer to sell your invoices.
3. The factor looks over your receivables and decides which invoices, if any, they’re willing to buy.
4. The factor draws up a contract with details of their fee (usually a percentage of the total invoices).
5. The factor advances you 75% to 85% of the total value of the invoices.
6. When the factor collects from your clients in full, you get the rest of the money, minus the factoring fee.

Many businesses actually set up an ongoing relationship with a factor, ensuring that the accounts receivable factoring process can be repeated regularly, creating a stable cash flow system.

When factoring works well for a business

Accounts receivable factoring works very well in situations where a business might need immediate capital for expansion. However, receivables financing also can be used by companies that have been waiting for customers to pay their invoices to keep regular businesses processes going.

When the economy is in flux, many banks are reluctant to approve loans for businesses, especially for small businesses and start-ups. Because invoice factoring is based more on the value of invoices rather than credit score or current tangible assets, it is possible for businesses that were denied traditional financing to get the cash that they need.

One important note about factoring: the fees can be high. Additionally, some of your customers may be concerned if they see that you are working with a factor as they may question if you’ll be able to provide them with support. This means you need to choose your factoring company carefully. Make sure to concentrate on the factor’s costs, professionalism, experience, and overall reputation.

Get matched to multiple local factors by submitting a free BuyerZone request for factoring quotes. To get more details about factoring, read our Factoring Buyer’s Guide.