Accounts Receivable Factoring: What is Factoring Receivables?

Accounts receivable financing, also known as receivables factoring, could be a good way to access capital today to fuel growth or fund other business initiatives without borrowing. Available to startups as well as established companies, Riviera Finance provides funding within 24 hours after invoices are verified. It offers non-recourse factoring and cash advance amounts up to 95% of the invoiced amount. AR factoring doesn’t impact a business’ credit rating or loan interest rate. Providing immediate cash flow helps companies build a working capital reserve for future growth and take advantage of new business opportunities. Cash flow issues can significantly impact the growth and profitability of your business.

Facilitate business growth

While often lumped in with loan options, invoice factoring isn’t technically a loan. When you sign on to work with a factoring company, they pay you for the invoice and take on the responsibility of collecting payment from the client. Companies can use the money from invoice factoring for whatever they need. Once the client pays the invoice, the invoice factoring company will take out their fees and interest and then pay the company any remaining funds they are owed. Terms for factoring receivables tend to be short because they reflect the payment terms of your invoices.

What is Accounts Receivable Factoring?

Accounts receivable factoring can be a reliable source of funding to bridge the gap between slow and busy times of the year. Accounts receivable factoring can help companies provide better customer service by offering more flexible payment terms and bookkeeping providence reducing the time and effort required to collect customer payments. Let’s say a business has $100,000 in eligible accounts receivable and the advance rate is 80%. After receiving payment in full, the factoring company clears the remaining balance, typically 1 – 3%, to the selling company.

If your clients are expected to pay within 30 days, that’s a pretty quick turnaround. Terms for business lines of credit vary but may last anywhere from 12 weeks to 18 months, while some lines of credit may even be open-ended, renewing annually. Let’s use the example below to illustrate the cost of factoring receivables. Say you’re a small business owner with $100,000 in outstanding invoices due in the next 30 days, but you need that cash now to cover some of your operational expenses. For cash-strapped businesses with late-paying customers, accounts receivable factoring can help them get paid without chasing down customers.

How factoring receivables works

You decide to factor this invoice through Mr. X, who offers an advance rate of 80% and charges a 10% fee on the amount advanced. Based on these factors, the factoring company determines the discounted rate at which they purchase your receivables. This rate can range from as high as 4% to as low as 1%, depending on the specific conditions mentioned above. In a spot deal, the vendor and the factoring company are engaging in a single transaction. Once you develop a relationship with a factoring company, you can return to them again and again. However, the factoring company will evaluate each of your customers for creditworthiness before deciding whether to factor those invoices.

Factoring is not considered a loan because the involved parties neither issue nor acquire debt as part of the transaction. The funds provided to the company in exchange for the accounts receivable are also not subject to any restrictions regarding use. Lastly, there are a number of new factoring companies in the marketplace. However, you are usually better off with an established company with years of experience. You will be better served by a finance company with experience in your industry. The offers that appear on this site are from companies that compensate us.

What are some factoring receivables companies?

This is why factoring receivables could end up getting much more expensive. If the invoice is never paid and you’ve agreed to recourse factoring, the invoice will be sold back to your business. You’ll sell the invoices to your factoring company, which offers an 80% advance rate with a 3% factoring fee. Automation can generate and deliver invoices on time, help you accept and process payments quickly, match and apply payments to open invoices, and ensure financial reporting accuracy without manual intervention. In short, accounts receivable automation software streamlines the entire collections process and accelerates cash flow.

1. All else being equal, regular, recourse, and notification deals are less risky for a lender (or a factoring company); non-recourse, non-notification, and spot deals are more risky.
2. During the application process, factoring companies request documentation, such as financial statements, customer payment history, and credit reports.
3. Customers also need to be other businesses or government agencies, not individual buyers.
4. The factoring company will set specific terms and conditions, depending on the risk involved in the transaction.
5. Let’s say a business has $100,000 in eligible accounts receivable and the advance rate is 80%.

To avoid this issue, you need to ensure that you receive payments from customers on time. And to do that, it is crucial that you manage your accounts receivable well. However, managing accounts receivable is not easy, especially if you do not have a robust collections team in place. Once the difference between tangible and intangible assets with examples payment is received by the factoring company, they deduct their fees and the retained amount, typically ranging from 1% to 3% of the total invoice value. Over the next 30 to 90 days, the factoring company takes charge of collecting the payment from your customers based on the agreed-upon payment terms.

Revenue tied up in unpaid receivables can affect payroll and overhead costs, putting the company in a precarious position. Accounts receivable factoring can be invaluable during these times when companies need immediate cash flow without waiting for customers to pay invoices in full. AR factoring also enables companies to be in more control during the loan process compared to bank lending.

To qualify for accounts receivable factoring services, business owners need to have established invoicing practices that give details about sales, prices and payment timelines. Customers also need to be other businesses or government agencies, not individual buyers. Selling all—or a portion—of its accounts receivables to a factor can help prevent a company that’s cash strapped from defaulting on its loan payments with a creditor, such as a bank. A simple solution is to offer early payment discounts to select customers. As its name implies, this solution gives the client a 1% to 2% discount if they pay within ten days. Otherwise, the client must pay the total cost of the invoice on their usual terms.

Factoring, on the other hand, often has very few restrictions on the uses of loan proceeds. This flexibility is another reason many borrowers might be willing to pay a premium. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website.

One financing option that can help address this challenge is accounts receivable factoring, also known as invoice factoring. Understanding the benefits and mechanics of this financial strategy is essential for business owners and managers. A factor is an intermediary agent that provides cash or financing to companies by purchasing their accounts receivables. In short, a factor is a funding source; the factor agrees to pay the company the value of an invoice—less a discount for commission and fees.

Factoring allows a business to obtain immediate capital in the amount of the anticipated future income due from all outstanding invoices. These invoices are captured in accounts receivable, an asset account on a company’s balance sheet, which represents money owed to the company from customers for sales made on credit. For accounting purposes, receivables are recorded on the balance sheet as current assets since the money is usually collected in less than one year. Receivables factoring transactions are usually structured as a sale of your invoices rather than a loan. Keep in mind that invoice factoring can be expensive, and there are other options, including business credit cards, that could offer lower rates depending on your business credit score profile. With business lines of credit, borrowers are given a credit limit and can borrow up to that amount.