Accounts Receivable Financing (Factoring)

Accounts receivable financing also known as factoring, is the purchase of accounts receivable at a discount. That is, a factor is a person or business that pays immediate cash (somewhat less than the invoices’ face value) for business receivables.

Typically, an unpaid invoice that will be paid by a financially strong company has great value. Factors pay cash for the right to receive the future payments on clients’ invoices to their customers.

Factoring is not a loan with interest due, but the sale of an asset for which a discount is paid.

How much does factoring cost and how does it work?

The amount a factor advances and the cost in discounts paid by a factoring client can vary widely and depend on

1. the company’s industry
2. the creditworthiness of the customers
3. how long the customers take to pay
4. the dollar volume of the factored invoices.

What can a business accomplish by factoring?

Cash from factored receivables allows the business owner to meet other regular business needs such as:

• meeting payroll
• paying taxes
• purchasing supplies
• funding marketing efforts
• taking advantage of discounts for paying with cash.

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