How factoring accounting works

Organizations, particularly small businesses and start-up companies, recognize the difficulties of maintaining steady cash flow that leads to success. Waiting for clients to pay their outstanding invoices can bring operations to a standstill and cause tension with employees. One way to ease cash flow difficulties is through factoring accounting. By selling your invoices to a third-party, you can get the upfront cash needed to keep your business growing.

Factoring accounting basics

Through factoring accounting, it’s possible for you to get money for your unpaid invoices. Rather than waiting 30, 60, or even 90 days for a customer to pay an invoice, you get a portion of the money owed to you up front. This process works when a factoring company, or factor, buys your invoices directly from you at a discounted rate. They’ll typically advance you 75% to 80% of the invoice value up front, and then pay you the remaining balance – minus their transaction fee – after the invoices are paid in full.

Factoring accounting ensures that you have the capital you need to expand your business, pay your staff, and buy necessary equipment. It’s a way to get the cash you need immediately without spending time securing bank loans or other types of business financing.

Cautions about factoring

Although factoring accounting can be helpful, it’s important to realize that there are concerns associated with the practice. Simply put, factoring is not for everyone. You should keep the following in mind before you enter a factoring agreement:

• Factoring companies can turn down invoices they deem “too risky”
• Invoice factoring can cost more than a short-term loan
• Customers may become concerned when they see a factoring company's name on the invoice instead of your company’s name
• Some companies won’t work with you at all if your invoices total less than a certain amount each month

Before deciding that cash flow factoring is the route your business should take, carefully consider your options. Do your homework and find a reputable and professional company to work with. Then, if you are comfortable with the process and feel that it will benefit your business, find a factor that has your best interests in mind.

BuyerZone can help you find a factoring company to work with. Simply complete our quick and easy request for factoring quotes form, and we’ll match you with multiple companies in your area. Learn more about how factoring works with our Factoring Buyer’s Guide.