How do accounts receivable financing work?Posted by Flowers Bernstein on June 10th, 2021 Accounts receivable financing, or factoring, is a financial transaction in which a business sells its invoices to a finance company that specializes in buying invoices at a discount (called a factor). Accounts receivable factoring is also known as accounts receivable financing or invoice factoring. recievable factoring Companies choose invoice factoring if they want to receive cash quickly rather than waiting for the duration of the credit terms. Factoring allows companies to immediately build up their cash balance and pay any outstanding obligations. In other words, invoice factoring helps businesses free up capital that is tied up in accounts receivable and also eliminates the default risk associated with the receivables to the factor. Factoring companies take a percentage of the total amount of receivables being factored as a factoring fee. The rate charged by factoring companies depend on the following: The industry that the company is in The volume of receivables to be factored The quality and creditworthiness of the company’s customers Days outstanding in receivables (average days outstanding) Many owners look to their banker to help out when they are stuck in a pinch, but getting a bank loan isn’t easy. Factoring accounts receivable makes it possible to finance an existing business without a loan. With accounts receivable financing you get the bulk of the money owed to you almost immediately, to make sure you can cover the expenses that come with running your company and also have the capital you need to grow.Like it? Share it! |