Accounts Receivable Factoring Can Be a Powerful Working Capital Tool

Accounts receivable factoring is the process of selling your receivables at a discount for immediate cash.  This allows the accounts receivable seller to have the cash back in the business instead of waiting 30 to 60 days for payment and this often provides huge cash flow advantages.  Factoring invoices has been around for hundreds of years, but has made big resurgence during the last 10 years as bank lending no longer provides the needed working capital for many small businesses.

The way factoring receivables works is the factoring company (factor), provides cash for your invoices after you invoice your customers.  Many factoring companies use the term purchase your receivables, but in reality they are really just advancing funds against your receivables as the primary collateral for the transaction.  True no recourse factoring is not very common these days as most companies that need factoring do not want a factor calling customers for collections and payments.  So if the factor sets your discount fee at 2.5%, the factor keeps 2.5% of the invoice total as their fee for providing the funds immediately.  Most factoring companies will advance 80% to 90% of the total up front, and then provide your business the remaining amount 20% to 10%, less your discount fee, once the invoice is paid by your customer.

You are normally given up to 90 days for payment to arrive and if the payment does not arrive the factor will come back you for collection.  It's important to keep in mind that today's factoring is mostly full recourse so you will need to manage the relationship with your customers and make sure payments still arrive within a reasonable time period.  The good news is that is much less likely that the factoring company will pester your customers for payments and destroy your customer relationships.  This allows factoring to work more like a bank line of credit for working capital.  You get needed funds in advance of payment for your accounts receivables without having an outside company make collection calls on the customers you have worked so hard to earn.

If your company could benefit by having funds available before your accounts receivables pay out, then factoring could be a valuable working capital tool.  As banks continue to limit lending products to small businesses factoring companies have stepped in with some very attractive working capital solutions.  Most of today's factoring companies can provide more receivables funding than a bank without the need to sell your customer relationships in the process.

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