Factoring Accounts Receivable
Factoring Accounts Receivable Overview
Factoring accounts receivable is a common method of trade finance that provides exporters with liquidity by factoring or selling their accounts receivable. The accounts receivable are sold at a discount but they are also sold without recourse. Factoring accounts receivable is an ideal solution for companies that need extra cash for inventory, payroll or marketing because it creates an immediate influx of cash from the invoices already on your books. Companies can access quick cash from their invoices to start their next project. Factoring accounts receivable can be utilized as needed or on a continuing basis. Factoring accounts receivable provides companies the ability to offer terms to international customers but still receive cash when the goods are delivered.
Traditional factoring is an ideal solution for companies that need extra cash flow to purchase inventory, cover payroll or invest in marketing. You are able to create an immediate influx of cash based on the invoices already on your books. The finance provider, known as the factor purchases all of your accounts receivables and advances you 70% to 90% of the total amount within 24 to 48 hours. The factor pays you the remainder of what you’re owed once your client pays the factor, usually 30 to 45 days later. It deducts a small fee, based on the size and age of each invoice.
Types of Accounts Receivable Factoring
Small business owners opt for this form of factoring when they do not want to factor all of their invoices. Typically, businesses will want to spot factor when they don’t need a steady flow of cash or have varying gross margins where it does not make sense to factor. Unlike traditional factoring, where the company turns over all invoices, spot factoring is available on an as-needed or one-time basis. This flexibility comes at a premium but often makes sense if you have one client that is particularly slow or if a consistent flow of capital is not needed.
Construction finance offers sub-contractors and general contractors access to quick cash from your invoices so you can get the funds you need to start your next project. The financier (factor) purchases construction invoices and advances a percentage—often within 24 hours—then collects the funds and forwards the remainder of the invoice to you, less a factoring fee. Few factoring firms work with the construction industry, but we have direct lines into those that do. We will help you find the financial partner that will provide the best solution for your company’s particular situation.
Export factoring works for companies that want to offer terms to international customers but still want to receive cash when the goods are delivered. The factor or finance company, purchases your receivables and forwards payment, usually 70% to 90%, once it has the receivables documentation. The client pays the factor, not you, once it receives the goods. The factor pays you the balance when it receives payment from the customer, less a small fee.
Medical Services Factoring
Medical Services Factoring fills the cash gap inherent with receivables of third-party payers, such as insurance companies, Medicare or Medicaid. It gives you quick access to funds to pay bills, payroll, and buy equipment. With Medical Services Factoring, you perform a service and send the invoice to the factor. The factor then forwards a percentage of the invoice to you. After the factor collects the invoice from the debtor, you receive the remaining amount on the invoice, less the factoring fee.
Recourse v Non-Recourse Factoring
Recourse Factoring is appropriate if you have financially healthy clients. You agree to buy back or exchange with other invoices of equal or greater value, noncollectable invoices. Recourse factoring offers lower fee because of less risk.
With non-recourse factoring risk of insolvency and non-payment is transferred to the Factor. The Factor cannot come back to you for payment if the customer fails to pay. The Factor is not required to cover disputed invoices.
Best Practices For Factoring Accounts Receivable
A factor is a financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
A factor allows a business to obtain immediate capital based on the future income attributed to a particular amount due on an account receivable or business invoice. Accounts receivable function as a record of the credit extended to another party where payment is still due. Factoring allows other interested parties to purchase the funds due at a discounted price in exchange for providing cash up front.
The terms and conditions set forth by a factor may vary depending on their own internal practices. Most commonly, factoring is performed through third party financial institutions, referred to as factors. Factors often release funds associated with newly purchased accounts receivable within 24 hours. Repayment terms can vary in length depending on the amount involved. Additionally, the percentage of funds provided for the particular account receivables, referred to as the advance rate, can also vary.
Factoring is not considered a loan because the parties don’t issue or acquire debt as part of the transaction. The funds provided to the company in exchange for the accounts receivable is also not subject to any restrictions regarding use.
Advantages of Factoring Invoices
- No Business Credit Required: Factors make financing decisions based on the creditworthiness of your customers, not your business.
- Factoring Is Fast: Once you are set up with a factor, you can most often have money in your account in 48 hours or less, much faster turnaround than a bank!
- Additional Services: Factors provide many additional services to their clients such as billing, collections, and account receivable management, allowing you to focus on growing your business and increasing sales.
- Manage Cash Flow: Factoring gives you the liquidity you need pay your bills and grow your business. No more waiting 60 days or more to get paid!