Factoring of accounts receivable is not something that is new. In fact, it is one of the oldest forms of business funding, dating back to traders in Ancient Mesopotamia and carrying through to the textile and clothing manufacturers in England through to emerging businesses in the early days of American settlement.
Today, factoring is used in all industries where the seller or service provider offers net terms on payment of invoices to their customers. When considering the question, “What is factoring accounts receivable?”, keep in mind it is not a new option for businesses to use.
The Basics
A simplified answer to what is factoring accounts receivable is that it is an advance on existing invoices from the business to a customer. The factor, who is not a bank, purchases the invoices from the business. The factor then advances up to 80% of the value of the invoices to the company for immediate use.
This allows the company to avoid waiting 30 to 90 days for payment. It also means that the money advanced by the factor is not a loan and requires no repayment. As this is a short-term transaction, the factor charges a rate for the service, which is deducted from the 20% withheld. Once the customer has paid the factor for the full invoice, the fee for the service is deducted, and the company is forwarded the balance.
The Process
For the company selling the accounts receivable, the process is very simple. A quick online application form is completed and approved by the factor. The invoices are then submitted, and the funds are advanced. The entire process is typically completed in a few business days, immediately providing the cash needed for the business to be able to take on new work, buy supplies or pay bills and make payroll.
Answering the question what is factoring accounts receivable helps to make the simplicity and efficiency of this process very clear. Unlike a loan, this is a short term arrangement between the business and the factor, just be sure to check the terms of the agreement and shop for the best rates.
