The Basics Of Accounts Receivable Factoring

Accounts receivable factoring is one of the common options when looking to access working capital for a company. It is good for small businesses because they can have access to cash within a short period of time without the need for assets to cover a loan. It is also beneficial for larger companies that want to present a more positive cash flow on their books.

It is not the same as invoice discounting in which the invoice is used as collateral for a loan. In accounts receivable factoring a company sells any outstanding invoices to a factor at a discount. When it is due the money can be collected by the factor or by the company and then used to settle the debt with the factor.

Factors are used not just to advance cash against an invoice but for a number of other reasons too. It is convenient for small companies because they do not have to rely on their own credit worthiness but can take advantage of the credit worthiness of larger companies to which they owe goods or services. Many of the functions that would be difficult for small firms are taken care of such as credit checks or debt collecting.

There are essentially two different forms of accounts receivable factoring. If the credit is to be advance then 70-85% of the total amount will be paid up front. When the payment is due the company will receive the balance due, less the commission and charges if the payment is made on time. Alternatively the entire amount, less charges, can be paid when the invoice or invoices are due.

The charges will depend on the range of services that are provided. The invoiced company does not always have to be notified that the invoice has been sold. In some cases the invoice seller will collect the payments when they are due and this will result in lower charges for them. If they do not take the option of insurance then it will cost less but then they become responsible if the payment is not made.

Although there are many reasons to use this type of financing there is the impression that companies that make use of it are in trouble. At times it can be a last resort of financing but it does not always indicate that a company is in trouble. Still some companies prefer not to notify the debtor for this reason.

In some cases companies will have variable cash flow throughout the year. At times they will have a lot of money coming in and at other business will be quite. In this case a factor can be used on a regular basis to bridge the more difficult times. There are other instances when a company is in trouble and it does become the last resort. In this case it might be useful but the profit margin has to be substantive enough to cover the cost.

At times it could just be used as bridging finance when other options that take longer are being explored. Venture capital can take much longer to gain access to and it is actually more expensive. Generally the decision to use accounts receivable factoring will be made when it is decided that using cash for business operations will generate more money than if where tied up with the debtor.