Factoring Made Simple
Factoring is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company, also known as a “factor.” This is done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Factoring is sometimes called “accounts receivable financing.”
Factoring is not a loan. It simply provides funds that allow a company more flexibility than with a traditional bank loan.
The terms and nature of factoring can differ among various industries and financial services providers. Most factoring companies will purchase your invoices and advance you money within 24 hours. The advance rate can range from 80% to as much as 95% depending on the industry, your customers’ credit histories and other criteria. The factor also provides you back office support. Once it collects from your customers, the factor pays you the reserve balances of the invoices, minus a fee for assuming the collection risk. The benefit of factoring is that, instead of waiting one to two months for a customer payment, you now have that cash in hand to operate and grow your business.
- You perform a service for your customer.
- You send your invoice to a factoring company.
- You receive a cash advance on your invoice from the company.
- The company collects full payment from your customer.
- The company pays you the rest of your invoice amount, minus a fee.