Account receivables financing is also referred to as "invoice factoring". It is the sale of invoices (receivables) to a factor company for anywhere from 70% to 90% of their total value. This is mainly used in order to generate immediate cash flow for the business selling the accounts receivable. The remainder of the invoice amount is remitted upon collection, minus a small service fee, of the outstanding invoices.
It is important for the business selling the receivables to verify the creditworthiness of their customers. Factoring companies do not like when they cannot collect on a receivable they purchased and your business will be held responsible for the customers that do not pay their invoice.
The 3 Main Advantages of account receivables financing:
- Immediate Cash/No Waiting. You can receive quick payment following shipment, delivery and invoicing (less than 24 hours in some cases) to generate cash much sooner than if you collect the money on your own.
- Analysis of customers’ creditworthiness. Prior to purchasing your invoice, a factor conducts a credit analysis on the client you are invoicing to determine the risk. You are entitled to the resulting analysis and can assist you in your future business dealings with that customer/client.
- You are not borrowing money. Again, the cash advanced is based on your client’s credit status, not yours.
You may qualify for factoring even if you are a young company without an established track record, have a tax lien, or even declared Chapter 11 bankruptcy. This is not considered a loan since you are literally selling your own receivables. Factoring is also not recorded on the balance sheet.