Accounts Receivable Funding (Factoring) Explained
Accounts Receivable Funding (Factoring) is a method of financing used by businesses to quickly raise capital and improve cash flow.
It turns invoices and accounts receivable to cash or lines of credit and effectively delegates your bill collection activities elsewhere.
How Does Accounts Receivable Financing Work?
A business sells its invoices at a discount to receive a cash advance within a couple of days instead of waiting 30 to 90 days for a customer to pay the invoice
The invoices are used as collateral in the factoring agreement. The financing company gives the business an amount equal to a reduced value of the unpaid invoices or receivables.
When the invoices or receivables are paid, all amounts advanced plus discount and associated fees goes to the finance company and the remainder goes to the business.
This in summary is the process of factoring, and may be is repeated as often as needed.
What Are the Benefits of Accounts Receivable Factoring?
- Fill cash flow gaps that would typically occur between invoicing a customer for goods or services sold and when you actually receive payment.
- Outsource the management of accounts receivable processing and collections.
- Support seasonal demands, growth, and business opportunities.
- Grow your business, restructure, take advantage of supplier discounts, hire more employees, or fund payroll.
- Fewer restrictions and less expensive than equity financing.
- Shift the risk of default to the financing company.
- And more…
Who Benefits from Accounts Receivable Factoring?
You outsource the difficulties in processing and collecting invoices with the additional benefit of receiving a cash advance up front on outstanding invoices within 24 to 48 hours after approval. And you do not have to give up any equity in your company.
Your customers do!
You can still allow your customers up to 90 days and longer in some cases to pay invoices.
Your business does!
You can attract more customers, sell more goods and services, and focus more on managing and growing your business.
What are the Frequently Asked Questions (FAQ) and Answers about Accounts Receivable Factoring?
What is Accounts Receivable Financing?
It is a method of funding not available through traditional lenders. Accounts Receivable Financing, Factoring, or Funding is the sale of invoices at a discount in exchange for fast cash.
What are other names for Accounts Receivable Financing?
It is sometimes known as a ledgered line of credit or invoice financing. Accounts Receivable (A/R) Financing is also known as Funding or Factoring.
How long before I receive funding?
If you are an established client, it typically takes from a few hours and up to two days after invoices are submitted and verified for you to receive funding.
If you are a new applicant, it takes about a week to establish you as client, which is faster than waiting for a bank loan.
What are the steps for Accounts Receivable Financing?
- Account set-up
- Preparing your receivables
- Verifying your receivables
- Payments and settlement
What does the account set-up include?
Checking the quality of your customers’ credit, your receivables aging report, for encumbering liens on those receivables, and whether your corporate taxes are current. It may also include background checks on signatories and owners of your business.
How do I prepare my receivables?
Select and submit the customer’s invoices or receivables you wish to sell along with supporting documents, a schedule of accounts, or other recognized request for funding.
Newer invoices are generally more valued than older invoices.
How are invoices verified?
Upon receipt of the invoices and receivables, the finance company verifies them with the customer to ensure the invoice amounts are correct, there are no offsets, and they are due within the terms allowed.
What occurs during financing?
The finance company calculates the cash advance and deposits the funds in your bank account. The advance is a percentage of the invoice funded and varies by industry and other criteria.
How does the financing company collect payment?
Your customer sends payments to the financing company or facility that it allows to process payments in your name. The customer can also pay electronically and the funds are deposited to a special account.
What is included in settlement?
Once funds are received, the invoices are marked as paid and you receive a rebate for the remaining percentage of the invoice amount minus discounts and related fees.
How much are the factoring fees?
The fees vary depending on volume, invoice size, and your customers. The fees are generally no higher than those charged by a credit card company for doing business with them.
Are factoring fees deductible?
Yes, factoring fees are deductible as a business expense.
Do I have to finance all my invoices?
No, only those invoices you want to factor. However, if you have more invoices from the same customer we generally recommend that you factor all invoices from that customer to reduce confusion about payment.
Will you collect old accounts for me?
Unfortunately, we only collect on current and up-to-date accounts. Factors are not a substitute for a collection agency or an attorney.
Will factoring invoices hurt my relationship with my customers?
Actually, it can help your relationship to factor your invoices. Finance companies are often the first to hear if a customer is dissatisfied with your products or services or is experiencing financial distress. We can pass this information to you so you can take the appropriate action to keep the customer happy and protect your business.
Additionally, factoring is an established method for optimizing cash flow. When a factoring company is willing to finance your invoices, you are considered a good risk.
Can I still borrow from other sources if I factor?
Yes, you can. With factoring, your plant, equipment, intellectual property, inventory, and other assets are not encumbered by the process as they would be with a traditional loan.
Accounts Receivable Financing with Factor Funding Company
Factor Funding offers you and your business:
- A customized program that is specific to your needs.
- A separate office to process your accounts receivables and represent your company.
- Experienced and dedicated professionals to process invoice payments, collections, and more.
- The financial ability to meet increased demand or take advantage of a business opportunity.
- Secure access to account information by phone, email, fax, mail, and online 24/7.
- And much more!
For a nominal fee between 1% – 3% for each invoice funded per month, you can receive all the benefits of factoring with Factor Funding Company.
Rates vary depending on the industry, volume, and other criteria. You can qualify online and be approved within hours if you sell on terms to other reputable and credit-worthy businesses.
To get started, please click here to download and print our accounts receivable factoring application form or call 713-660-8300.