Accounts Receivable Factoring

May 7th 2016

Overview

Accounts receivable factoring refers to receivable capital in the form of unpaid invoices that do not have a lien placed on them. They are sold to institutions for discounted prices. This means that you will sell invoices, for which you have not received payments, to institutions for a lesser price than the original invoice value.

How It Works

It is different from a bank loan in that it is not a loan to be repaid and the emphasis is on the value of the receivables. Institutions sell their invoices to the factoring company and collect the full amount. The factoring company then takes care of collecting those unpaid invoices. In other words, it is outsourcing the receivables collection process. This is an extremely effective method for companies to get access to capital they desperately need.

Benefits

Accounts receivable factoring offers many benefits to the businesses. The main benefit is that you will be able to have access to capital without having to use your credit to do so. In fact, you will actually be using the credit of your customers in order to have access to this capital as the factoring institutions will rely on the worthiness of your customers' credit in determining whether or not they wish to purchase your invoices. Another great benefit of accounts receivable factoring is that you are not required to utilize any type of loan or borrowing process. This is ideal for many businesses that need money they have rightfully invoiced and simply cannot wait 60 or 90 days to receive the payment.

Cost/Pricing

Some of the major concerns companies have when it comes to accounts receivable factoring are the costs involved. The only cost you will incur is the money you will lose on the amount invoiced after you have sold them for a discounted price to an institution. This is a relatively low cost for the amount of benefits you will receive when utilizing accounts receivable factoring.

Timing

Institutions generally go for accounts receivable factoring when they do not have any hope of getting back the unpaid invoices and when they are in need of money. In such cases, the factoring companies may provide the cash worth the unpaid invoices at a discount. They do not require any business plan or tax statements. They are just an instant form of cash.

Companies/Industries

There are many companies and institutions that provide accounts receivable factoring services. The good news is there are more and more of these companies coming up regularly as this practice started becoming popular. One of the first things you should do is contact your financial institution to get its recommendations for these types of services.

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