Accounts receivable financing is another name for factoring. It is a financial exchange between two companies. One company, the factor, purchases the accounts receivable of another company in need of cash.
The process is quite simple and is a speedy and efficient way for a company to get cash when they need it without going the traditional route of getting a bank loan. The exchange benefits both parties. One company gets cash and the other (the factoring company) buys the receivables at a discount. Once the receivables are collected, the reserve is given back to the seller minus the factor’s fees.
Uncollected invoices have been purchased and sold for some time now. It isn’t a new financial arrangement, but it is still quite effective and is an excellent option for many companies, mostly for those that fall into a few specific categories. New companies, those looking to grow rapidly, businesses with cash flow problems and those that have been denied a loan from the bank, all make excellent candidates for accounts receivables financing.
Selling unpaid invoices is a way for a company to immediately get the cash they need without having to use their assets as collateral, which might occur with a loan. Such loans put a company’s assets at risk if the company is not able to repay it.
Once the invoices are sold to the factor, they will need to handle all of the collection duties. The way this is handled depends on the specific factor and whatever collection policies they adhere to.
The primary benefit of factoring (also known by other names such as invoice financing, po funding, receivables financing, ar funding) is that it allows companies to access needed funds without assuming new debt. These funds can be used in numerous ways. A business may use it to purchase much needed inventory, cover operational expenses or to pay their employees. It can also be used to grow and expand the company. This might include funding additional product lines or paying for bigger advertising campaigns.
As you can see, receivable financing can be very advantageous for both the company selling their invoices and the business that is buying them. Again, the factor purchases the invoices at a discount and then collects them at full price. They return the reserve to the seller, minus predetermined and agreed upon fees.
The company selling the accounts receivables gets immediate cash without having to obtain a loan. When handled correctly and in partnership with a trusted, professional factoring company, the process can run quite smoothly and can benefit both parties.
On the other hand, if the seller makes a mistake in choosing the factor or does not fully understand the agreement, there could be some serious repercussions. Therefore, it is paramount that the seller does his due diligence and has 100% confidence he is working with a competent factor.