Accounts Receivable Factoring

What is Accounts Receivable Factoring?

Accounts receivable factoring, also known as invoice factoring, is the oldest form of business financing. Since the early days of humanity various forms of accounts receivable factoring have been used. Today accounts receivable factoring is a completely different notion than the olden days where sticks and shells were money. When a client or company has a purchase order it is sent to the accounts receivable department. Most of the time orders are fulfilled immediately, however large contracts or purchases may have an extended payment plan. Often time’s payments are made each month to satisfy the debt owed to your business.

When a business is in need of capital they have several options. Accounts receivable factoring is the most popular option because of its convenience and simplicity. If a business wants immediate cash they can choose to sell their invoices or debts to another company. This is called accounts receivable factoring because a financial company will factor all of your accounts receivables and decide how much money is owed to you and how much they can give to you in exchange for those invoices.

Why is Accounts Receivable Factoring good for my business?

Accounts receivable factoring is the preferred method of business funding for two reasons; speed and ease. When a business needs funding there are three main ways they can get it, through traditional bank loans, investors or invoice factoring. If a business decides to apply for a bank loan there are usually rigorous credit and sales checks. Banks do not like to risk their money and unless your business has a pristine history you may not qualify. Once qualified however there is a long wait to receive your businesses funding. Sometimes bank loans can take a month or more to deliver on the deal. If a business needs freely flowing capital immediately then a month will not do.

There is another route for business funding and it is through investors. However investor funding is typically difficult to obtain and carries with it steep consequences. Investors are looking for one thing; return on investment. No investor will provide money for your business unless it’s well worth his time. When receiving business funding usually there are stipulations that take a chunk of profit and/or power away from you and your company. Also it takes a great deal of time to receive investor funding because investors must carefully research your business to see if their money will be well spent. While investor funding is a great option for many, in a crunch it will not work.

What will happen to my customers?

Many companies have long standing relationships with their clients and do not wish to jeopardize them. Many business owners are hesitant to go after accounts receivable factoring because of the fact that they will relinquish control of debt collection. While a business may be patient and flexible on collection a financial agency may not. This is not a one way street however as there is no guarantee your customers are going to ever pay up. It is in the interest of both the financial company and your company to protect the customers and make sure all debts are squared.