Accounts Receivable Factoring is a way to receive cash for invoices that have not yet been paid. It’s an attractive alternative to a business as it presents no-risk to you, does not require perfect credit, and is not a loan so you won’t take on more debt.
The process is very simple and the turnaround time for approval is much quicker than a traditional bank loan process would be. It’s a stress-free way to relieve a cash crunch.
How Accounts Receivable Financing Works
Accounts Receivable Financing, or Factoring, requires you to send your outstanding invoices (Accounts Receivable) to a Factoring Company. This company essentially buys a percentage of the invoices from you and advances you that amount. Companies that factor their invoices generally receive as much as 85-90% of the invoice amount as cash free and clear with no restrictions on how that cash can be used.
The Factoring company then collects on the invoices, freeing you from having to handle that process yourself. Once the invoice has been paid by your customer, you receive whatever percentage of the invoice you did not receive up front, minus the Factoring company’s fee. So if you factored 90% of the invoice you would receive that amount upfront. Once the customer pays on the invoice, the Factoring company forwards you the remaining 10% minus their service fee.
Fees and charges vary among Factoring companies so that is one thing you’ll have to evaluate when you’re looking for Factors for your invoices. (that is why we have created a + or – key on certain variables in each company’s description)
Simple 4-Step Process
Accounts Receivable Financing is a simple 4-step process:
- You perform work or provide a service to your customer as usual.
- You send the completed invoice for said customer to a factoring company.
- You receive a cash payment from the factor, based on the invoice amount.
- The factoring company collects payment from your customer and sends you the remainder amount due to you.
Working With a Receivables Finance Company
The exact terms and conditions of your Accounts Receivable Financing will depend on the factoring company you choose. Some Factors allow you to factor only a select portion of your invoices. Others will choose select debtors and still others will require all invoices and customers. Likewise, fees, the application process, and other requirements will vary from factor to factor. Always be sure to look at the fine print and details of the factoring agreement to make sure it fits with your needs.
National Factoring Group matches companies with factors based on may of the criteria mentioned above to ensure you are matched with the right factor for your needs. Our passion is helping small businesses find accounts receivable financing so they can continue to grow and succeed.