Accounts Receivables Factoring: How To Finance An Existing Business Without A Loan

Factoring accounts receivable makes it possible to finance an existing business without a loan.  For years, debt was the accepted, and even recommended way, for a business to generate capital for maintenance and growth.

Factoring accounts receivable is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate credit risk. Factoring is commonly referred to as accounts receivable factoring, invoice factoring and sometimes erroneously accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset-based lending (ABL) using a company’s accounts receivable as collateral.

Benefits of Factoring Accounts Receivable

Receivables factoring is a rather simple form of commercial financing.  It requires very little, mostly that a company has clients with good credit.  There is little consideration given to how long a company has been in business or their credit history.  Instead, they can “piggyback” on the credit scores of their clients.  Accounts receivables factoring isn’t a good option for every business, but it is for a great number of them.

When a company chooses this option, they will need to locate a factor.  A reputable, well-established one is ideal.  Factors routinely purchase accounts receivables (invoices) at discounted prices, generally for 70% to 90% of their value.  They then assume the role of a collector.  All payments or invoices are sent to them instead of the company which sold them.  When necessary, they will send out billing reminders and make phone calls to delinquent accounts.  After they have collected the invoices, they will return the monies to the company they bought them from, although not all money will be returned.  The factor will retain their fee and any money already paid toward the balance of the invoices.

What is the Cost of Factoring?

The factor’s fees will be dependent on a number of things, the age of the invoices, when they are due, the credit history of a company’s clients, as well as their own experience and reputation.  There will be other considerations as well with these just being a few of the primary ones.

How to Select the Proper Factoring Company for your Business

It is very important that companies are careful about the factor they choose and the contract they sign.  A factor will come into contact with a business’ clients and if they are rude and/or unprofessional, it can threaten that relationship.  The contract is also important because an unfair contract can end up costing a company a tremendous amount of money.

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