Account receivables factoring is the selling of accounts receivable or invoices in order to secure immediate, working capital (cash). Factoring has been used by businesses around the world for more than four centuries to manage cash flow. Here is a little bit about how accounts receivable factoring works.
If your business extends credit to customers on net terms, depending on how long the terms are for, you must wait a while before you can actually get paid. Until then, you are left with accounts receivable. Accounts receivable are simply future payments that you are entitled to collect for goods or services provided after a given amount of time.
A factor company purchases your receivables by giving you an advance payment up front. This advanced payment is usually 70 – 90% of the total value of the receivables. After charging a small fee (2% and up) the remaining balance is released upon full receipt of payment for all the receivables/invoices. This allows your business to be able to make those larger sales and still have the working capital to continue operations and further growth.
Reasons to Factor:
- Obtain a source of working capital
- Relief from responsibility for collection of no-pay and slow-pay clients
- Fill more orders
- Flexible funding program that increases as you increase your sales
- Ability to take advantage of vendor discounts
- To have funds for payroll and taxes
- Extend credit to customers on large orders
- Buy equipment or inventory on demand